|MEGA KUDOS to BOB BRINKER for warning Moneytalk Program listeners on Jan 20, 2001 (2-1/2 months ago) to check their money funds for holdings of commercial paper issued by Southern California Edison and Pacific Gas & Electric (now bankrupt).|
I did that then and closed two money funds because the fund family gave me an unclear response to my pointed questions. Only kept funds that clearly said they had zero such holdings.
One typical unacceptable blow-off response I got was "don't worry, we guarantee the fund $1 NAV or we'd be out of business in one day". The problem with that answer is that when pressed for an answer, they would not specify when money is placed into the money fund to replace the guaranteed worthless commercial paper (ie. PG&E).
It is of paramount importance how and when (if ever) the loss from worthless commercial paper is funded. Does the management company replace the loss with new investable money
- Immediately ?
- As investors withdraw money from the money fund in the amount necessary to get to $1.00 NAV vs. actual NAV including the loss.
- Over some other prescribed arbitrary period.
- Never since the loss is deducted from future fund earnings over some arbitrary period.
Obviously, every day the money replacement is not made, is another day the worthless paper earns no income and acts as a drag on overall money fund performance.