By Miles Weiss
Jan. 22 (Bloomberg) -- Pacific Investment Management Co. plans to increase its lineup of money-market funds, an investment class that the largest U.S. bond manager mostly avoided until industry assets soared 23 percent in 2008.
Pimco, based in Newport Beach, California, filed Jan. 16 with the U.S. Securities and Exchange Commission to sell shares in the new Treasury Money Market and Government Money Market funds. The funds will cater to institutional investors and will be run by Paul McCulley, a 10-year Pimco veteran who manages the $3.6 billion Short-Term Fund.
The company, with $790 billion in assets under management, has one prime money fund, a category that invests in corporate debt. Pimco missed out on the investor rush into funds that focus on government securities after the $62.6 billion Reserve Primary Fund suffered losses from the September bankruptcy of Lehman Brothers Holdings Inc.
“Money-market funds have had a number of problems,” said Peter Crane, president of Westborough, Massachusetts-based Crane Data LLC, an industry research firm. “But they were still the single best performing segment of the mutual-fund business as far as asset growth goes.”
McCulley, 51, was traveling and didn’t return telephone calls to his office seeking comment. Pimco spokesman Steven Vames declined to comment.
Assets in taxable money-market funds, including those that invest in Treasuries and government debt, jumped 23 percent to $3.25 trillion at Nov. 30, 2008, from $2.64 trillion at Dec. 31, 2007, according to the Washington-based Investment Company Institute. Assets in stock and taxable bond funds declined 45 percent and 8.9 percent, respectively.
Fund Flows
Institutions had plowed $1.17 trillion into Treasury and government money-market funds at Dec. 31, up from $679 billion at the end of August, according to iMoneyNet, a research service that is also based in Westborough. Institutional holdings in prime money-market funds dropped to $1.03 trillion from $1.29 trillion during the same period.
Asset managers generally earn slimmer profits running money-market funds than stock and bond funds, said Geoff Bobroff, president of Bobroff Consulting Inc., an industry research firm in East Greenwich, Rhode Island. With yields on three-month Treasury bills turning negative in December, such funds have become even less lucrative to run, as managers have had to waive fees and limit new cash to maintain payouts to shareholders.
“In today’s marketplace, the margin is quite insignificant on money market assets, especially government money-market assets,” Bobroff said.
Fees
According to Pimco’s SEC filing, investors in the Government Money Market fund can choose between two share classes that require them to pay annual management and distribution fees of either 18 or 43 basis points. With a basis point equaling one-hundredth of a percentage point, the lower expense ratio works out to $18 for each $10,000 invested.
On average, Pimco bond mutual funds have an expense ratio of 102 basis points, according to Morningstar.
Money-market funds, considered the safest investment after cash and bank accounts, may only purchase debt that matures in 397 days or less. They are required to maintain a mix of securities with an average maturity of no more than 90 days.
Pimco ranked 77th in size among investment advisers that offer money-market funds, according to Crane. Its lone offering, Pimco Money Market Fund, started in 1991 and held $628 million in assets at the end of last year. Pimco had encouraged clients to make use of the company’s bond research capabilities to invest in funds that offered higher yields with little additional risk in comparison to money-market offerings at rival firms.
Flight to Safety
The problem was that the funds offered by Pimco competed with prime money-market funds that invested in corporate debt, primarily commercial paper. The bankruptcy at Lehman Brothers and the meltdown at Reserve Primary caused a shift in the money- market industry from prime funds for the safety of government funds, according to a December article on Pimco’s Web site by Paul Reisz, the firm’s product manager for enhanced cash and stable value strategies.
“Before this crisis, prime money-market funds, which held mostly commercial paper, were thought to be just about the safest investments in the market,” Reisz said in the article. “But investors quickly understood that prime funds were no longer immune to the credit crunch because of their corporate exposure, and they fled to only the safest assets -- Treasuries.”
To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net
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