Money Fund managers debate merits of insuring the risks
When William Donoghue held his annual Money Fund Forum in Reston, Va., recently, he suggested the funds consider beginning a self-insurance pool. He told the fund managers he thought most shareholders would give up 10 basis points (about 1/10 of 1 percent) to have the security blanket of an insurance guarantee. ''I figure it would help to keep the new boys in town in line,'' he said in an interview, ''since I think the biggest threat comes from the banks and credit card companies getting involved.''
Mr. Donoghue says the response he got was that some of the larger funds would like to have some leverage over the smaller ones which might cause the industry some embarrassment.
''Fund managers told me, 'I want the knowledge that if something happens, it's taken care of,' '' he says. He also believes self-insurance is in keeping with the Securities and Exchange Commission's concept of self-regulation. Ideally, Mr. Donoghue says, ''it wouldn't be a bureacratic nightmare, but with people like Sears getting into the fund business, the cost would be minimal and the benefits tremendous.''
Not all the industry, however, is so sanguine. Richard Reilly, vice-president of Fidelity Management Company, says he's not certain the insurance industry would be so overjoyed to insure the funds. ''While the risk is small,'' he says, ''the exposure is gigantic. So I'm a little skeptical one could get insurance that is meaningful.''
With calculator in hand, Bruce Bent, president of the Reserve Fund, a money market fund, says if the premium on such insurance were about 10 basis points, it would cost the industry about $170 million a year (0.001 of $170 billion.) Mr. Bent recalls that when he first established the Reserve Fund, the first fund in the business, insurance companies were talking about charging 1/2 of 1 percent.
''But who will insure these things,'' he says, ''when the portfolio is made up of such companies as Citicorp, Bank of America, and Chase. If any of those banks go down, you know there will be a lot more following, including the insurer.'' The only risk Bent sees is in the commercial paper market, and the major advantage in insurance, he says, is that it might ''shut up the doom-and-gloomers.''
Ian MacKinnon, vice-president of investments at the Vanguard Group, says he believes insurance would mainly benefit the lower-quality money market funds. If they were to sit under an umbrella held up by more financially conservative funds, such as Vanguard, he isn't certain he would be interested in it.
Mr. Reilly of Fidelity says he would prefer that the industry form a self-regulatory organization that made sure the funds lived up to their prospectus promises. He figures an effective inspection program, combined with adequate disclosure, might better protect the investor from a fund that reached for yields by investing in risky companies or banks. But he adds, ''I don't want to penalize our shareholders to protect them from some charlatan.''
Mr. MacKinnon of Vanguard says he would favor self-insurance instead of group insurance. That way, funds with heavy commercial paper or Eurodollar exposure would pay higher rates than those invested in Treasury bills or high-grade bank certificates of deposit.
The money market funds are continuing to switch their investments into longer-term holdings. According to Donoghue's Money Fund Report, the average maturity for 130 funds reporting to it was 37 days. Mr. MacKinnon of Vanguard says the fund group has extended its maturity for its two money market funds from 14 days in mid-October to 44 days and 28 days.
Burnell Stehman, vice-president at Fidelity Management and Research, says his fund is also gradually extending its maturities, reflecting the belief that interest rates will become less volatile.
And at the Dreyfus Liquid Assets Fund, Monte Gordon, director of Dreyfus research, says the maturity level is out to 46 days, from only 28 a month ago.
The advantage of extending maturities can be seen by the success of the Merrill Lynch Ready Assets Fund, with assets of $22 billion. The fund recently moved a significant amount of its assets into 90-day Treasury bills, nailing down a substantial yield. Thus, the fund is currently yielding 19.5 percent, whereas the average fund tracked by Donoghue is yielding 14 percent.
H. H. Robertson Company has picked up another supporter. Merrill Lynch, Pierce, Fenner & Smith Inc. has raised its investment rating of the Pittsburgh-based supplier of nonload-bearing metal products for commercial buildings from ''OK'' to ''Buy.'' In the Merrill Lynch scheme of ratings, this is the strongest rating the big broker gives.
Merrill Lynch says the company's performance has been stronger than it previously anticipated. ''On the basis of continued larger than expected gains in earnings and backlog and rapidly increasing penetration of some business sectors, particularly office construction, we expect upward profit momentum to persist through 1983.'' Thus, the broker has raised its earnings estimate for 1982 to $6.75 a share and for 1983 to $7. The chief concerns, Merrill says, are the nonresidential construction outlook, which is weak; some erratic quarterly earnings results, given the company's conservative accounting procedures; and some difficulties in its European operations.
Robertson is also a favorite of Robert Gintel, who runs the Gintel Fund and owns 78,000 shares. Gintel, in a recent interview in the Monitor, said he expected the company to be a prime beneficiary of any ''reindustrialization'' in the country.
Recession jitters continued to bother Wall Street as investors pulled back. For the week, the widely watched Dow Jones industrial average lost 2.95 points, closing at 852.93. Marathon Oil stock was among the most widely traded stocks, closing at 1071/4 a share, up over more than 30 points for the week. US Steel agreed to buy the company for about an average of $106 a share. But Wall Street analysts believe another bid may yet be made by Mobil Corporation, whose last bid was $85 a share.