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Money market funds hit by wave of withdrawals

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Money market funds – a safe investment. But many people are starting to doubt this piece of wisdom. Even this type of funds, where Czechs have deposited CZK 100 billion, have been losing money in the last few months.

Many Czechs became frightened when they saw a 2-3% drop in their funds’ assets. Just in October they withdrew CZK 7.7 billion more than they have deposited.

That is a billion more than in the first nine months of this year and constitutes a significant chunk of the record CZK 10 billion that people have withdrawn from all funds this month.

Just to compare: From January to September, even despite the turbulence on the capital markets, people withdrew CZK 11 billion, in other words, almost the same amount they withdrew in the “black month” of October.

Poor results for money market funds are a new phenomenon.

These funds invest in safe, short-term government securities, and they were always at least slightly in the plus. This wasn’t sufficient to combat even a 6% inflation, but at least they appeared to be making money.

Excessive investments
“Clients who don’t have their portfolios spread out and who focused on just one fund that yielded a small but steady profit are understandably panicking now,” said Jan Barta, head of ČSOB Investiční společnost.

According to fund analyst David Urbánek from the company Moneco, money market funds, with an eye toward higher profits, invested not only in state bonds but also in the company bonds of some European firms – including banks. And bank bonds are losing the most money right now due to the financial crisis.

“The funds have not broken any regulations, of course. They are not obliged to only invest in state bonds. But anyone, for example, who has just a few percent in the bonds of Icelandic banks, which have lost a lot, it will notice the difference. A lot of it had to do with luck,” said Urbánek.

Clients are leaving everywhere
All funds are seeing many of their clients leave right now – not just money market funds. According to the Czech Capital Market Association, people withdrew a total of CZK 10.2 billion more in October than they have put into all funds. The total sum of withdrawals is even higher – more than CZK 12 billion.

The losses of equity funds, especially, continued to increase. Česká spořitelna’s fund Sporotrend lost the most money – nearly 30%. Since the beginning of this year, it lost 66%. “In the last two months, our mutual funds saw a decrease in the volume of assets over CZK 10 billion. This is because people withdrew money and because of the falling financial markets. But people have redeposited more than two thirds of the withdrawn amount into Česká spořitelna’s bank accounts,” Radek Urban, head of fund operator Investiční společnost České spořitelny, told HN.

The bank’s funds manage around CZK 60 billion. According to Urban, clients are leaving now in smaller and smaller numbers, and he expects that investors’ trust will soon be restored.

But it will all depend on the situation on the interbank market in Europe and in the United States, as well as on world stock markets.

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