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Money market mutual funds, already paying near-zero yields, could see those payouts fall further under proposed new rules to boost the safety of the portfolios.
The Securities and Exchange Commission today proposed tightening restrictions on money funds’ investments, hoping to avoid a repeat of the sudden demise of the $60-billion Reserve Primary fund last September.
Money funds, which hold a total of $3.6-trillion in investors’ savings, would have to hold more of their assets in only the most liquid securities, so that they have ready cash to pay off investors who want out.
The most liquid assets also typically pay the least, so owning more such securities probably would put more downward pressure on fund yields. The average taxable money fund’s annualized yield now is a mere 0.13%, according to iMoneyNet Inc.
 Money funds already are designed to allow investors to get in or out at will, at a constant $1-a-share asset value. But when investors deluged the Reserve Primary fund with redemption notices in September it was unable to meet all of those requests.
That triggered a run on other money funds, forcing the U.S. Treasury to step in and guarantee fund assets to stem investor panic.
SEC commissioners today proposed that funds serving individual investors would have to hold at least 5% of their assets in cash, Treasury securities or other investments that could be sold in one day. At least 15% of assets would have to be in securities that could be sold within a week.
Those percentages would be doubled for funds that serve institutional investors.
The SEC also proposed that the maximum average maturity of fund holdings be cut to 60 days from the current 90 days, which also would likely depress portfolio yields further. . . .
Read on »
Money market mutual funds could eventually be forced to float their share prices rather than maintain the constant $1-a-share value that has made the industry a popular haven for investors’ cash.
That idea is mentioned in the Obama administration’s wide-ranging plan to revamp financial-industry oversight.
Regulators, the administration says, should consider whether it would be better for the financial system overall if investors were weaned from believing that money funds can’t lose principal value.
When a major money fund suffered investment losses that caused it to slightly drop its share price last September, the news triggered a run across the $3.6-trillion industry. That forced the Treasury to step in and issue a blanket guarantee of money fund assets, to calm investors.
 "The vulnerability of money market funds to ‘breaking the buck’ and the susceptibility of the entire . . . industry to a run in such circumstances remains a significant source of systemic risk," the administration says in its blueprint for regulatory reform.
Because money funds own mostly short-term, high-quality corporate and government IOUs, they haven’t been required to reflect daily fluctuations in the value of those IOUs in their share prices, unless the securities permanently lose value (say, in the case of a bankruptcy).
That has allowed the 38-year-old industry to maintain $1-a-share pricing, which to investors has made the funds appear as safe as federally insured bank accounts.
The industry fears that allowing money fund share prices to float, even if the daily changes were tiny, would destroy investors’ faith in the funds.
Given the record low yields on money funds -- an average of just 0.13% currently, according to iMoneyNet Inc. -- even a slight share decline could wipe out interest earnings.
The administration said it was open to other ideas to reduce the risk the industry poses to the financial system, including requiring the funds to buy emergency insurance from private sources to damp the risk of runs.
The Securities and Exchange Commission will take up the question of money fund reforms at a meeting Wednesday, and may ask for public comment on the $1-a-share pricing issue and other possible changes in money fund regulation, Bloomberg News reported.
-- Tom Petruno
Money management giant BlackRock Inc. late Thursday agreed to buy Barclays Global Investors -- including the iShares exchange-traded funds -- creating the world’s biggest asset manager.
The deal would boost BlackRock’s assets to more than $2.7 trillion from $1.3 trillion, vaulting it well above its nearest rival, State Street Corp., which manages about $1.4 trillion.
The takeover is a potential coup for 56-year-old BlackRock Chairman Larry Fink, a UCLA grad who founded the company in 1988. The New York firm is best known for its fixed-income funds, a business that puts it head-to-head with Newport Beach-based Pimco.
 With the purchase of San Francisco-based Barclays Global, which pioneered index-fund investing nearly 40 years ago, BlackRock would gain a much larger presence in the stock fund business, including via Barclays’ exchange-traded funds. Barclays' iShares unit is the industry leader in developing and managing popular stock and bond ETFs.
Reuters has some interesting factoids on Barclays Global and its historical connections to Wells Fargo & Co. and UC Berkeley. Go here.
Barclays Global is being shed by British banking titan Barclays as the latter seeks to raise capital to offset soaring loan losses.
BlackRock agreed to pay $6.6 billion in cash and 38.7 million of its shares for Barclays Global. The deal would give Barclays a 19.9% stake in BlackRock, which plans to rename itself BlackRock Global Investors.
BlackRock’s shares closed at $182.60 on Thursday, up $4.08, before the deal was announced, although it had been expected. The stock is up 36% this year.
Pimco, which is owned by Germany’s Allianz, manages about $800 billion. Pimco just this month launched its first bond ETF and plans at least six more, competing directly against iShares’ offerings.
-- Tom Petruno
Photo: BlackRock CEO Larry Fink. Credit: Carolyn Cole / Los Angeles Times
Besides the apparently moderating recession, what gets Wall Street bulls excited these days is talking about the mountain of cash sitting on the sidelines -- particularly in money market mutual funds.
Money fund assets have risen dramatically in the last three years, to the current $3.7 trillion from $2 trillion in mid-2006.
Sooner or later, bulls surmise, investors will grow weary of tiny yields on money funds -- now averaging a record low 0.15% on taxable funds -- and will funnel a chunk of that cash into the stock market, providing more fuel for an extended bull run.
In a research report on Monday, Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said that whenever money market assets have exceeded 25% of the capitalization of the Standard & Poor’s 500 index, stocks have rallied over the following two years. That number currently is 43% after having peaked at 58% in mid-December.
 There’s no doubt that some fickle money-fund cash will flow into stocks; indeed, after peaking in early January, money fund assets have edged lower as the stock market has surged.
But money funds might not provide as much juice as the bulls expect.
For one thing, much of the cash flow into money funds over the past two years had little to do with the collapsing stock market, said Peter Crane, chief executive of research firm Crane Data.
Corporations, which account for two-thirds of money-fund assets, have built up funds for purposes ranging from emergency reserves to bankrolling mergers, and are unlikely to put that cash into stocks, Crane said.
That’s a big reason why overall money-fund assets are down only 4% from their mid-January peak despite the torrid market rally since early March.
"Money is trickling back in off the sidelines, but the thought that this wall of cash will come pouring back into the market overnight is ridiculous," Crane said. "If it were going to do that, it already would have."
So-called retail money funds -- those used by individual investors as opposed to institutional investors -- have been losing assets at a faster clip this year. Retail fund assets are down 8.2% from their January peak.
But the build-up of cash in those funds in 2008 was due in part to dissatisfaction with fixed-income investments that went awry, such as exploding auction-rate securities and some surprisingly risky short-term bond funds, Crane said. So some of that money now may be heading back into other income-oriented investments -- including corporate-bond funds, which have seen hefty inflows this year, and bank accounts -- rather than into stocks.
Still, bulls believe that a significant amount of the cash on the sidelines will eventually find its way into equities once bear-market scars fade a bit more (and assuming there isn’t another market bomb on the horizon).
"It’s like donuts," Ablin said of the stock market. "You swear them off. You’re never going to have them again. Then you try them and slowly you get back into them again."
-- Walter Hamilton
Sticking with stocks was a good idea this year. Sticking with junk corporate bonds was an even better idea.
The junk, or high-yield, market has rallied powerfully since the stock market bottomed on March 9. Bond prices have surged, driving yields down sharply.
The average annualized yield on an index of 100 junk issues tracked by KDP Investment Advisors has plunged to 10.59%, down from an 18-year high of 17.7% in December.
The average junk bond mutual fund’s year-to-date total return -- price gain plus interest earnings -- was 21% through Thursday, according to Lipper/Reuters data. By contrast, the total return of the average domestic stock fund was 9.3%.
 The same improved investor sentiment that has boosted the stock market also has lifted junk bonds, which are debt issues of companies rated below investment-grade: If the economy begins to recover in the second half, so should the finances of many now high-risk companies.
But as with the rallies in the stock and commodity markets, the question is whether the junk rally has gone too far.
"It’s feeding on itself," said Kingman Penniman, head of KDP in Montpelier, Vt. In other words, the better the market does, the better it does, as money chases after it.
That’s great for "momentum" traders, but "for fundamental investors, it’s murder," Penniman said.
What gives him pause, he said, is that the riskiest junk bonds have rallied much more since early March than those of better quality.
Yet even if you believe that the economy will get better in the second half, many financially challenged companies are too far gone to be saved, Penniman said. The credit outlook for those companies "is getting worse, not better," he said.
Indeed, defaults by junk companies are continuing to surge. A total of 25 U.S. companies defaulted on their bonds in May, bringing the year-to-date total to 101, according to Standard & Poor’s.
That left the trailing 12-month default rate at 8.25% of the junk bond universe. And S&P predicts much more to come: It is forecasting the 12-month default rate to reach 14.3% by April 2010.
"It could reach as high as 18.5% if economic conditions are worse than expected," S&P warned in a report this week.
Obviously, investors know that defaults are going higher. So a bet on a diversified portfolio of junk bonds is a bet that interest income from the companies that keep paying their debts will more than offset losses from defaults.
The question is whether average junk yields now under 11% will be enough to compensate for the bombs that have yet to go off -- or whether it’s smarter to wait for an inevitable market "correction" before putting more money into the junk bin.
-- Tom Petruno
L.A.-based Capital Group Cos., parent of the American Funds mutual fund group, plans to cut about 9% of its global workforce this month in its second round of layoffs this year.
The privately held company, one of the world’s biggest asset managers, told employees this week that 820 jobs would be lost out of a total of about 9,000, spokesman Chuck Freadhoff said.
Like many money managers Capital Group has been shrinking staff as assets have dived with the stock market’s plunge over the last 18 months. The company, known for its conservative, "value"-oriented investing style, manages about $850 billion in stocks and bonds, down from a peak of $1.2 trillion.
Fund companies charge management fees as a percentage of assets. So as the market value of their investments has plunged, and as some investors have pulled money out, fee income also has slumped.
 Although jobs are disappearing across the financial industry, Capital Group’s unprecedented staff cuts are a heavy blow to the firm’s self-starter culture. The company slashed about 500 jobs in January, and in March gave advance warning about the layoffs announced this week.
The new cuts will be across nearly all departments, including marketing, accounting and office services, Freadhoff said. But as with the January layoffs, the firm said none of its portfolio managers or analysts would lose their jobs. The long tenure of the 80-year-old company’s investment management staff has always been one of Capital Group’s selling points with investors and financial advisors.
Capital Group employs more than 2,500 people in Southern California, including its downtown L.A. headquarters staff and its account-servicing staff in Orange County. Freadhoff said the firm wouldn’t say how many of the new layoffs would be in the Southland until all of the affected workers had been notified.
-- Tom Petruno
L.A.-based money manager TCW Group, which hopes to launch itself as a publicly traded firm in the next few years, won’t be doing so under current Chief Executive Robert D. Beyer.
In a surprise, the 49-year-old Beyer will step down at the end of this month after less than four years in the job, TCW announced today.
In a letter to some of his colleagues, Beyer said he was leaving because he believed the company would need a different style of management as it makes the transition to being an independent firm. He said the decision to depart was his alone.
 It ought to be an interesting job opening for the growing universe of restless Wall Streeters, as the financial industry continues to shrink: TCW, parent of Trust Co. of the West, manages about $100 billion in stocks and bonds, mainly for institutional clients such as public pension funds, companies and universities.
The company has been majority-owned by banking giant Societe Generale of France since 2001, when TCW founder Robert A. Day sold Societe a controlling stake.
But like many banks, Societe Generale has been rethinking its long-term business plan amid the upheaval in the global financial system. In January, Societe agreed to merge its European and Asian money management operations with those of rival Credit Agricole.
Although TCW will remain part of Societe for now, the plan announced in January calls for TCW to be spun off as its own company within five years.
The 65-year-old Day, who has remained chairman of the company, said Vice Chairman Marc I. Stern would take over as interim CEO on July 1. Stern, also 65, had been president of the firm from 1990 to 2005.
Beyer follows William Sonneborn out the door. Sonneborn, 39, stepped down as president of TCW last year to become CEO of KKR Financial Holdings.
-- Tom Petruno
Photo: Robert D. Beyer. Credit: TCW
If the U.S. dollar's spring slump continues to deepen this week, we can expect to hear the Obama administration try to shore it up with the boilerplate line about how "a strong dollar is in America’s interest."
But a strong greenback definitely is not in the interest of U.S. investors who have money overseas. The broad rally in other major and minor currencies against the dollar since early March has sharply boosted Americans’ returns on foreign assets.
The dollar's weakness is one reason why the average foreign stock mutual fund is up 14.4% year to date, more than twice the 6.7% gain of the average domestic stock fund, according to Morningstar Inc. data. Foreign diversification is working again for American investors, as it did for most of this decade.
Over the last three months the Canadian stock market has risen 28% in its own currency, but for U.S. investors the gain is a hefty 48% because of our dollar's dive against the Canadian dollar.
 The German stock market is up 28.5% in euros over the last three months but the gain is 43% measured in dollars. The story is similar across most of Asia and Latin America.
The math is straightforward: As the dollar sinks, securities denominated in rising foreign currencies automatically are worth more when translated into dollars.
As noted in this post, just about everything has been working against the buck this spring. As investors have begun to feel more confident about the global economy, some are shoveling money into traditionally riskier non-dollar assets, such as emerging-market stocks.
The dollar also has been victimized by the sell-off in Treasury bonds that was triggered at least in part by concerns about Uncle Sam's record borrowing binge. And as all that borrowing has fueled worries about potential inflation down the road, some investors have dumped dollars in favor of commodities -- which is why gold is again nearing $1,000 an ounce.
What's not to like about a falling dollar? It means we have less purchasing power abroad, of course, which will bite if you're planning a foreign vacation (another good reason for a staycation). And if the greenback weakens enough it could make its own inflation by raising the cost of imports.
For foreign investors, the dollar's slide means their U.S. assets are depreciating -- which is particularly aggravating to China, our biggest creditor.
Still, the current dollar swoon is just giving back some of what the buck gained in the second half of last year, when the global financial-market meltdown drove many investors into the perceived haven of the U.S currency. The euro, for example, plunged from $1.59 last July to $1.25 in February. It's now back to about $1.41.
So there's no dollar emergency at this point. For U.S. investors who held on to their foreign stocks and bonds through the September-to-March crash, the dollar's slide is just helping to speed the repair job on their mangled portfolios.
-- Tom Petruno
Photo credit: Associated Press
Technology stocks are making the difference in the turnarounds of some of the biggest stock mutual funds this year.
With Monday’s strong rally, the Standard & Poor’s 500 index climbed back into the black for the year: The year-to-date total return (capital gain plus dividends) for the Vanguard 500 Index fund, which replicates the S&P 500, was a positive 1.4% at the day’s close.
But investors in some well-known stock funds already are up by double-digit percentage amounts this year. Fidelity Magellan, for example, was up 16.2% through Monday. The Janus Twenty fund showed a gain of 15.2%.
The biggest U.S. stock fund, the American Funds group’s Growth Fund of America, was up 9.2%.
 Note, though, that all three of those funds suffered worse than the 36% drop in the average domestic stock fund last year. Magellan dived 49% in 2008, Janus Twenty lost 42% and Growth Fund of America sank 39%.
So some of this year’s rebound reflects the snap-back in some of the most beaten-down stocks in the funds’ portfolios.
In addition, though, by maintaining substantial holdings of tech stocks that were hit hard last year, the funds have benefited as that sector has resurged. Tech is the best performer of the 10 major industry sectors in the S&P 500 this year, up 19.4% through Monday.
Magellan’s biggest holdings as of March 31 included fiber-optics giant Corning Inc., which has jumped 59% this year after diving 60% last year; semiconductor manufacturing equipment maker Applied Materials, up 21% this year; and Apple Inc., up 55%.
At Janus Twenty, Apple was the No. 2 holding as of March 31. The fund also had big stakes in Blackberry maker Research in Motion (up 85% this year) and Cisco Systems (up 19%).
Growth Fund of America’s top five holdings as of March 31 all were tech issues, including Google Inc. (up 30% this year), Oracle Corp. (up 6%), Apple and Cisco.
Among other big funds, Fidelity Contrafund has been helped by tech holdings including Google and Apple this year, but those gains have been offset by steep declines in some of the brand-name consumer stocks that had held up well in 2008, including McDonald’s (down 14% year-to-date) and Procter & Gamble (down 19%).
Dodge & Cox Stock, which sank 43% last year, had Hewlett-Packard Co. as its single biggest holding as of March 31, but it hasn’t helped the fund’s cause: HP is a laggard among tech issues this year, up just 1% since Dec. 31.
-- Tom Petruno
Bond market guru Bill Gross' taunt to stock market bulls: Have fun while you can -- it won’t last.
Gross, who manages the Newport Beach-based Pimco Total Return fund, the world’s largest bond mutual fund, was out early Monday on Pimco's website with another dour commentary.
The stock market, however, wasn’t in the mood for dour: The Standard & Poor’s 500 stock index shot up 3.4% Monday -- which was more than the 2.8% that the Pimco Total Return fund has earned all year.
But those who’ve read Gross in the past won’t be shocked to see that he’s staying on point: He insists that, for the foreseeable future, the economic and political outlooks favor what he owns (mostly high-quality bonds), not riskier investments.
 "Do not be deceived by the euphoric sightings of ‘green shoots’ and the claims for new bull markets in a multitude of asset classes," Gross wrote. "Stable and secure income is still the order of the day."
The gist of his message is that the global economy is destined for slow growth for years to come, as consumers slash debt and as governments worldwide rein in the "libertarian capitalism" that gets much of the blame for the financial crisis.
President Obama’s attack last week on Chrysler debtholders played right into Gross’ story line. He described Obama’s move as another example of "the public, with government as its proxy, [deciding] that private market, laissez-faire, free market capitalism was history and that a ‘private/public’ partnership yet to gestate and evolve would be the model for years to come."
Gross, an Obama supporter, said capitalism was being "bridled, saddled and taught to trot instead of gallop over the investment plains." . . .
Read on »
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Tom Petruno
Tom Petruno has been chronicling financial markets' highs and lows since 1979, and has been the Times' financial columnist since 1990. He writes on markets, corporate finance and the economy, and how it all ties in to individual investors' portfolios.
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