Credit crunch takes shine off money market funds

By Claire Milhench - Analysis

LONDON (Reuters) - Europe's Triple-A rated money market funds no longer look like the ultra-safe bets they once were, as redemptions soar and differences in returns emerge on the back of the squeeze in global credit.

The funds have for years offered corporate money managers a secure location to store cash in the short-term while still getting higher returns than those offered by banks and all but guaranteeing no losses on initial investment.

Their conservative approach to investing, chiefly in copper-bottomed, highly-rated securities, meant that there was little difference in the returns and conditions offered by the various funds on the market.

But a spike in outflows due to investors scrambling for cash across Europe in recent months, has forced some managers to sell assets at a loss and allowed others to scoop up securities at a bargain, bringing about sharp disparities in performance.

One of the biggest U.S. funds, the Reserve Primary Fund, in September saw its net asset value fall below one dollar -- meaning investors lost money they had initially put in, and triggering a flood of withdrawals across the sector.

Market players say the result is investors have become more demanding over the details of how their money is managed.

"The failure of the Reserve Primary Fund in the U.S. has shown that primary credit research is necessary and relying on credit ratings is not sufficient," said Dan Phillipson, product manager for cash solutions at PIMCO.

Some funds have suffered as asset-backed securities (ABS) and special investment vehicles (SIVs), which had looked like ultra-safe bets, plummeted in value amid the turmoil in the banking and property sectors.