To illustrate the risks associated with money market funds, here are the stories of how two money market funds were closed following huge losses.
Standard Life's Pension Sterling fund diversified its investments out of bank deposits and very short dated instruments, and by July 2007 most of it was invested in floating-rate notes. However, this resulted in losses and volatility, with the fund losing 4.8 per cent of its value (around £100m) on one day alone in January 2009. Standard Life had to pay £103m into the fund to restore the value of the investors' holdings to the position they would have been in prior to the fall in the unit price.
Yet this fund was aimed at investors approaching retirement who needed something more stable than equities and bonds, and the fact sheet for the fund indicated it was 100 per cent invested in cash until April 2008. The Financial Services Authority (FSA) said marketing literature for this product did not meet its requirement of being "clear, fair and not misleading," and that this was inconsistent with the regulator's principle of treating customers fairly.
This resulted in the FSA fining Standard Life £2.45m, on the grounds that the fund manager had breached the regulator's guidelines on management and control, and communications with clients. The Pension Sterling Fund has now been closed.
Meanwhile, the Threadneedle UK Money Securities Fund was closed at the end of 2009 following massive losses and investor redemptions. Over the year to 2 October 2009 the fund lost 20 per cent, while the its money market funds on average returned 0.7 per cent. Threadneedle UK Money Securities Fund came under pressure when the market for mortgage-backed securities (MBS) and asset-backed securities (ABS) became illiquid and it was unable to trade them. These had been an integral part of the investment strategy of the fund.
However, Threadneedle's fund literature did indicate that it held higher-risk assets.
