Saturday, September 20, 2008

Putnam Closes Money Market Fund

For the second time in a week, a multibillion-dollar money market fund has been forced to take extraordinary steps to deal with sudden cash withdrawals by nervous institutional investors.

Putnam Investments, one of the oldest names in the mutual fund industry, announced Thursday that it was closing and liquidating its Putnam Prime Money Market Fund, a $12.3 billion fund that serves only professional investors. The action does not affect Putnam money funds that are sold to retail investors.

But the unusual step shows just how nervous investors — especially the professional ones — have suddenly become about a type of investment that was long considered to be as risk-free as a bank checking account.

The Investment Company Institute, an industry trade association, said Thursday that the funds serving institutions shrank by more than $173 billion, to $2.17 trillion, in the week that ended Wednesday — the worst decline ever among institutional money funds.

The net decline of $169 billion left a total of $3.41 trillion invested in all money funds, or 4.7 percent less than had been in those funds a week earlier, before the current tremors hit.

By contrast, retail investors appear to still see money market funds as safe havens. The money funds serving retail customers actually grew by $4.28 billion, to $1.24 trillion, over the same seven-day period.

Professional investors were clearly alarmed when the Reserve Fund, a company whose founder helped invent money funds in the mid-1970s, announced that losses on its stake in Lehman Brothers had pushed the share prices of three institutional funds lower than a dollar.

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