By DAVID MOON, Moon Capital
November 11, 2007
Most of the things we fear
never hurt us. It's the things we never consider that are dangerous. We don't
know what we don't know. As investors, that's especially
This became particularly obvious to me this week when I ran across
some surprising information.
While most of the $2.5 trillion invested in money-market
funds is invested in predictably low-risk assets like Treasury bills and
certificates of deposit, as recently as this summer money-market funds with
assets totaling $300 billion owned debt backed by subprime mortgages. Several of
the largest money-market funds are among the group.
On June 30, money-market funds managed or marketed by Bank of
America, Fidelity Investments and Morgan Stanley held $6 billion of investments
containing subprime debt. One Credit Suisse Institutional money-market fund held
eight percent of its assets in debt secured by subprime mortgages.
In total, money-market funds with assets of $300 billion invested
in subprime debt in 2007.
Remember, money-market funds are used by most folks like
savings accounts or CDs. Who would ever suspect that their presumably safe
accounts would own the same types of investments that brought down
multibillion-dollar Bear Stearns hedge funds or Citigroup CEO Charles
Give credit to the folks at Dreyfus. Two years ago they
adopted a policy preventing any Dreyfus money-market funds from buying
subprime-mortgage-backed securities. They admitted that the securities were
simply too esoteric to properly evaluate.
So, should you panic?
No. First, panic is seldom helpful. Panic comes from the Greek
word Panikos, which means 'a source of terror.' Terror doesn't go too
well with investing.
Besides, it won't do you any good.
It's difficult to know where ' or when ' the landmines might
be planted. Funds typically report their holdings only a few times a year,
usually several weeks or even months after the holdings date of the filing. By
then, many of the securities in the fund's portfolio have matured and been
replaced. Just because a fund owned some junk bonds in June doesn't mean that it
still does by the time you see its quarterly report in August.
Given the implosion in the subprime market, moreover, one
hopes that any fund that didn't own any of the offending securities in June
hasn't added them since then.
The biggest reason the subprime mortgage mess probably won't
affect your money-market fund is because the risk is known. By the time a risk
is known, investors typically adjust their behavior to avoid the potentially
offensive assets. And in fact, all of the money-market funds with subprime
assets protected their investors from any loss.
The lesson from this debacle is that there is always an unknown.
Just because something has never happened doesn't mean that it can't happen. In
a world where investors flock to funds with short-term performance improvements
of hundredths of a percent, managers can be tempted to take silly risks to boost
those figures. Doing so can attract billions of dollars of new assets for a
unknown risks for an investor.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).