Fund Managers Facing Problems Due To Foreclosures

February 21st, 2008

The debt crisis resulting out of foreclosure and the ever deteriorating real estate market may have an adverse effect on investors. According to Peter Crane, the president of a money market research firm called Crane Data, fund advisers face a bigger problem than the individual investors. The industry, so far, has responded not too badly to the debt crisis fueled by foreclosures. The money market mutual funds do not have a federal insurance backing, but there are no instances where individual investors have lost money ever since the money market fund came into being in 1970.

The only case of breaking the buck happened in 1994. From $1 the share value had reduced to 94 cents back then. Connie Bugbee, the managing editor of a money market research firm called iMoneynet says that the groups which were having potential problems had stepped in reasonably early. She also thinks that the chances of breaking the buck by any major fund is very slim, if at all.

However, some funds will have to spend plenty to stabilize, as they went into some very risky real estate investments, that may end up in foreclosure. Crane says, till now there have been 10 major fund advisors who have said that they would step in. The Bank of America has declared that it would offer $600 million in support of a certain faction of money market funds as their investment values in relation to subprime loans and foreclosures were uncertain. Legg Mason, a money manager was forced to manage a credit of $238 million for two money funds. The actual number of money market funds reporting such big losses is unknown. Even though the money market funds are regulated very closely, Don Cassisdy, the president as well as founder of the non-profit making Retirement Investing Institute said that they had certain problems.One such problem was that, agencies which measured the creditworthiness were unable to lower the ratings in time so as to alert the fund managers about the threatening debt crisis. Thus, funds which appeared to be good, suddenly went bad. Another problem was that the fund managers always tried to make more profit. The investors were stuck with poor rates, but the fund managers were also taking risks. A higher profit always comes with a certain amount of risk. So, it is safer to go for funds that make a smaller profit than risking high profit ones where the risk factor is always higher.