Putnam money-market fund suddenly closes after investors pull cash

BOSTON — Putnam Investments suddenly closed a $15 billion money-market fund today and announced plans to return investors' money after institutional clients pulled out cash despite the fund's lack of exposure to troubled financial firms such as Lehman Brothers.

The move, believed to be unprecedented in the $3.5 trillion money-market fund industry, came a day after asset managers sought to reassure investors in the wake of a massive pullout from large retail fund Reserve Primary Fund. The run on that fund caused its assets to plunge in value by nearly two-thirds and fall below $1 for each dollar invested.

While Boston-based Putnam said its Prime Money Market Fund continued to hold $1 in assets per dollar share as of Tuesday, it "experienced significant redemption pressure" on Wednesday.

The firm's trustees voted to close the fund and distribute all assets to investors as quickly as possible — an action Putnam said was "not related to the portfolio's credit quality, but was instead a reaction to marketwide liquidity issues."

When a fund suffers a sudden rush of orders to pull out money, fund managers must sell assets — typically at a loss when it must be done quickly, and especially amid this week's market turmoil.

Putnam said, "Serious constraints on liquidity in money market instruments created the risk that in order to process redemptions, the fund would realize losses in selling its portfolio securities. In the face of these challenges, the trustees determined to close the fund to ensure equitable treatment of all fund shareholders."

Putnam also asserted that the fund, like its other money market funds, had no exposure to securities of Lehman Brothers, Washington Mutual or AIG at the parent-company level.

The four-year-old fund, limited to institutional investors making initial investments of at least $10 million, held $15.4 billion in assets as of Aug. 31, according to Putnam's Web site. The fund's list of top holdings included several financial firms, led by Unicredito Italiano, and such banks as Royal Bank of Scotland and Bank of America.

Putnam's move to suddenly close the fund because of an investor pullout appeared to be unprecedented in the nearly 38-year history of the money-market fund industry, said Don Phillips, a managing director at fund researcher Morningstar, and Connie Bugbee, managing editor of iMoneyNet, publisher of a weekly newsletter called Money Fund Report.

"It's a very shareholder-friendly move to make," Phillips said. "If you see a redemption run in a fund, you end up with this bizarre situation where if people get out early enough, then the fund can sell the most liquid assets off first, and the investors end up whole, with a dollar per share invested.

"But later on, when others pull out, the fund has to sell under duress, and unload the less-liquid securities at low prices. And that causes people to suffer losses."

Institutional investors, Phillips added, "tend to move in herds, and they move big sums of money."

Despite the Putnam fund's lack of exposure to the hardest-hit financial firms, Phillips said "a lot of institutional clients don't want to have any money-market funds with corporate exposure, and opt for funds exposed to safer government debt.

"The scary thing is, we don't know whether we might see these things play out at other funds, and what kind of pressure that will put on the money-market fund industry," Phillips said.

Putnam, founded in 1937, managed $163 billion in assets as of Aug. 31, with $96 billion for mutual fund investors and $67 billion for institutional clients. In August 2007, insurance broker Marsh & McLennan sold Putnam to Canadian mutual-fund company Great-West Lifeco for $3.9 billion in cash. Great-West Lifeco is controlled by Canada-based Power Financial.

Also today, State Street tried to reassure investors that its money market funds are stable. The company said its Global Advisors' funds never fell below a net asset value of $1 and are not exposed to the troubled firms of Lehman Brothers, Merrill Lynch, Washington Mutual, Wachovia and Morgan Stanley.