How to Find Money to Invest in Real Estate

These days it’s particularly tough for someone involved in a small-business real-estate venture to find funding.

David Gass, founder of Business Credit Services of Las Vegas, offers these suggestions to real estate entrepreneurs in search of investors or loans.

• Put together financial documentation for your plan. Detail the time and money and “sweat equity” that you’ve already put in, the income potential, and the amount that you’re prepared to invest going forward,. Calculate a profit-and-loss statement that factors in costs for maintenance, repairs, property taxes, and advertising.

• Talk to local bankers first. They are the ones most likely to understand your business.

• Private investors and angel investor networks are another alternative. If you go this route, work with an attorney. “You need a solid structure in place with the right operating agreement to protect all parties,” Gass says.

Source: BusinessWeek.com, Karen E. Klein (02/02/2009)

Key Interest Rate as low as it can go

The Federal Reserve on Tuesday lowered its benchmark federal funds rate to a range or zero to 0.25 percent and said it would likely keep rates low for an extended period.

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Fed said.
The Fed also said it was prepared to purchase more debt issued or guaranteed by Fannie Mae, Freddie Mac and other government-sponsored mortgage agencies. And it said it is considering purchases of longer-term U.S. Treasury debt.

“The focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level,” it said.

Michael Woolfolk, senior currency strategist, at the Bank of New York-Mellon, applauded the Fed’s approach. “We think it’s the best possible move for the U.S.
consumer and for the financial market,” Woolfolk said.

Source: Reuters News, Mark Felsenthal (10/16/2008)

Mutual Funds Should Trim Fees To Ease Shareholders’ Pain

BOSTON — If the job of a mutual fund manager is to deliver returns that beat a stock market benchmark or that put them near the top of their peer group, then there is little doubt that most fund managers haven’t earned their keep this year.

That hasn’t stopped them from taking it.

Fund companies have raked in billions of dollars from investors, despite what can only be described as miserable, below-expectation performance.

The average funds in the large-cap growth, multi-cap growth, midcap and small-cap growth categories are all down more than 40% year to date, according to Lipper Inc.

The news isn’t much better in the value and core classifications for those asset classes, as the average player in those asset categories has lost one-third or more of its worth this year.

There also has been no shelter in other equity categories, with the average emerging markets fund off more than 55% this year and the average international fund down 45%. Indeed, the average fund in every equity category is down by more than 20%.

Even among bond funds, 11 of the 16 categories tracked by Lipper are negative so far this year.

Pay for performance

The question is whether the downturn is enough to have investors — and perhaps fund boards — considering whether they should push for a change the way management is compensated, further aligning the interests of customers and management by taking no fees if they fail to keep pace with an appropriate benchmark.

The poster child for this kind of activity is TFS Small Cap Fund (TFSSX) , a portfolio that opened in March 2006 with a performance-fee structure completely different than anything used widely in the industry.

TFS Capital Management of Richmond, Va. is best known for hedge funds, though it has a market-neutral mutual fund that it started in 2004 which has attracted about $380 million in assets and earned a five-star rating from Morningstar Inc. (Full disclosure: TFS invited me to be a board member of the market-neutral fund, which I declined because it would have been a conflict of interest.)

Hedge fund managers typically make money only if shareholders profit, and that was precisely the mentality TFS management brought to its small-cap fund, where the stated goal is to beat the Russell 2000 index (RUT) by 2.5 percentage points.

By topping the Russell by more than 2.5 percentage points, management could earn a bonus. That extra payment — based on how big the fund’s outperformance gets — would top out the fund’s expense ratio at 2.5%, or double what management would get with ordinary, index-like results.

If management lags the index, however, it must rebate fees to the fund. The worse the performance, the bigger the rebate.

So far, TFS Small Cap has not made much money. The fund is down about 35% year to date, while the Russell 2000 is off by 32%. Meanwhile, the fund’s losses since inception are slightly smaller than what an investor might have experienced in an index fund on the Russell, but they’re not 2.5 percentage points better.

‘Adding insult to injury’

And so, according to the fund’s Statement of Additional Information, TFS Small Cap has reimbursed the fund for all of the management fees it collected. Since inception, management has turned away some $200,000-plus dollars that most management firms would have pocketed.

To be sure, TFS Capital is not alone in having performance fees, Strategic Insight, an industry research firm, estimates that roughly 5% of all equity funds have performance fees, with Fidelity, Vanguard and Janus among the firms that have sliding scales for payment. It’s just that none of those other firms surrender everything when they fail to deliver.

TFS isn’t making an enormous sacrifice. The firm’s small cap fund has just a few million dollars in assets, and the paperwork suggests that 85 cents out of every dollar in the fund actually came from the managers, meaning that the firm is giving up fees that the firm’s top dogs would actually have had to pay.

But TFS co-founder and manager Richard Gates is right when he suggests that charging fees during times underperformance is akin to "adding insult to injury when it comes to investors who have already suffered an erosion of their principal."

And while reduced or waived fees simply appear to be the "right thing to do," there’s no rush of fund companies to make that happen.

Avi Nachmany of Strategic Insight notes correctly that performance fees have a number of practical issues which can make them hard to implement, and which also can lead to managers trying to game the system to inflate pay. As such, he doesn’t expect them to start gravitating toward performance fees any time soon.

That’s too bad. If fund companies are serious when they suggest that shareholders remain invested for some future turn-around, they could at least show some good faith and opt to waive or reduce fees to help ease the pain when it hurts the most.

Copyright © 2008 MarketWatch, Inc.

 

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World Is United To Tackle Financial Crisis, IMF Says

WASHINGTON — Financial policymakers from 180 nations around the world are united in their resolve to tackle the financial crisis, Youssef Boutros-Ghali, head of the International Monetary Fund’s policy committee, said Saturday. The International Monetary Fund endorsed the plan of action released Friday by the Group of Seven nations, he said. "The crisis is global, so the solution has to be global," he said. "No tools will be spared." Later Saturday, a smaller group of the 20 most important economies will meet to hammer out more details of what each country can do to restore confidence in markets. "No one is going to let an important financial institution fail," IMF Managing Director Dominique Strauss-Kahn said.

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Central Banks Cut Rates World-Wide

By SUDEEP REDDY and JOELLEN PERRY

With unprecedented global coordination, six central banks including the Federal Reserve and European Central Bank cut interest rates sharply Wednesday in an emergency move designed to offset the economic damage from a deepening financial shock.

The half-point rate cut, which includes action by central banks in the U.K., Canada, Sweden and Switzerland, came as stock markets around the world tumbled and troubles in the U.S. continued to infect foreign economies. The global move, after more than a week of speculation, came alongside separate rate cuts by central banks in China, Hong Kong and Australia over the past day.

Markets opened lower on the news but recovered a bit and were trading slightly higher. (See related article.)

The Fed’s reduction brought its interest-rate target down to 1.5%, ahead of its regularly scheduled meeting October 28-29, as the U.S. economy faces the prospect of deteriorating significantly in the coming months due to credit-market turmoil. Until recent weeks, Fed officials had resisted further easing due to worries about aggravating inflation risks after watching volatile swings in commodity prices throughout the past year.

The action also marks a sharp turnaround for the European Central Bank, which had held its key rate target steady at 4.25% due to inflation concerns.

The ECB’s single mandate is keeping euro-zone prices steady, and annual inflation across the bloc was 3.6% in September, nearly double the ECB’s target of just below 2%.

But ECB president Jean-Claude Trichet, in a press conference following the bank’s decision to keep its key rate steady last Thursday, said policymakers had discussed a cut in the face of market turmoil that looked increasingly likely to damp growth and inflation. Wednesday’s move takes the ECB’s key rate to 3.75% and many economists say the central bank is likely to follow Wednesday’s move with another cut at its scheduled meeting November 6.

The ECB has acted in tandem with the Fed just once before — in the aftermath of the September, 11, 2001 terrorist attacks, when both central banks also lowered their key rates by a half percentage-point.

The Bank of England’s half percentage-point cut, which brings its key rate to 4.5%, comes one day before its scheduled meeting in London.

The central banks said in a joint statement that inflationary pressures "have started to moderate" due to declines in commodity prices. "The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability," the statement said. "Some easing of global monetary conditions is therefore warranted." (Read the Fed’s statement.)

Since the credit crisis started in August 2007, central bank officials have taken joint actions repeatedly to ease pressure in short-term money markets. They’ve stepped up efforts in recent weeks as conditions deteriorated further.

Finance ministers and central bankers meet this weekend in Washington and could discuss other options to address the worsening global crisis.

Fed officials fear the turmoil in credit markets will further damage the U.S. economy, which has already been hit by a troubled housing sector and high energy prices. As banks tighten credit, preventing consumers and businesses from getting loans, consumer spending and the overall U.S. economy are likely to contract in the current quarter.

The Federal Open Market Committee voted 10-0 to cut its rate target.

"Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months," the Fed said in a statement Wednesday morning. "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

"Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation," the Fed’s statement said.

The Fed and other central banks also lowered their direct-lending rates. Financial institutions borrowing from the U.S. central bank’s discount window will now pay 1.75%, down half a percentage point.

"Given central banks are increasingly taking on the role of lender of last resort it will lower borrowing costs," ING economist James Knightley said in a note to clients. "It is also clearly boosting market confidence as can be seen in market moves."

But that confidence boost will be "temporary" and the rate cut "will not even be enough to offset the rise in market interest rates over the last few weeks," said Julian Jessop, chief international economist at Capital Economics Ltd. "The fact that the central banks have had to take such extreme measures underlines how bad market conditions have become." He said Wednesday’s cuts would be "the first in a series" bringing rates lower around the world in coming months.

Other economists said the size of the cut suggested policymakers hoped to influence asset-price developments. Central banks are "adjusting the fundamental risk-free rate in the economy," said Julian Callow, economist with Barclays Capital in London. "If you do that, you’re affecting the price of all financial assets. So this about trying to shore up asset prices, which have been collapsing. That’s fundamentally what this is about."

 

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Fed Will Lend Directly to Corporations

Fed to Lend Directly to Companies for First Time Since Great Depression, Hints at a Rate Cut; Stocks Fall as Dow Hits 5-Year Low

By JON HILSENRATH, DIYA GULLAPALLI and RANDALL SMITH

The Federal Reserve said it will bypass ailing banks and lend directly to American corporations for the first time since the Great Depression, and it hinted strongly at further interest-rate cuts — a cocktail of unconventional and conventional remedies for an economy whose prognosis is deteriorating rapidly.

The historic and potentially risky move of lending to nonfinancial corporations, the latest in a string of extraordinary steps taken by the Fed over the past month, carries the government deeper into the role of propping up private markets. Investors remain unconvinced any of it will work.

Stocks continued their relentless decline on Tuesday amid fresh concerns about the health of financial institutions. The Dow Jones Industrial Average fell 508.39 points, or 5.11%, to 9447.11, its lowest closing in five years. Shares of Morgan Stanley fell 21%, and American International Group Inc., which already received a government bailout, saw its shares drop 9.3%. Over the past year, the U.S. stock market has lost $7.2 trillion in market value, as measured by the Dow Jones Wilshire 5000 index, which includes almost all U.S. companies.

Fed Chairman Ben Bernanke, in a speech Tuesday to the National Association for Business Economics, said that history showed that the financial crisis would "take a heavy toll on the broader economy, if left unchecked."

The Fed’s move on Tuesday aimed to unclog the market for "commercial paper," essentially IOUs issued by banks and companies. Companies ranging from AT&T Inc. to General Electric Co. to United Parcel Service Inc., along with many U.S. and European financial firms, tap this $1.6 trillion market for short-term loans to fund their day-to-day operations.

The central bank, with the backing of the U.S. Treasury, said it would make loans directly to companies in this market. The move potentially puts taxpayers on the hook for new losses. Many commercial-paper loans are not secured by collateral. Though the Fed took a variety of steps to minimize its exposure, including asking borrowers to pay upfront fees, the government could suffer losses if corporate defaults rise and those steps prove insufficient.

By hinting that it is also considering further rate cuts, the Fed appears to be setting aside the inflation worries that dominated many of its internal discussions earlier this year, and potentially setting its rate target, now at 2%, back toward levels last seen after the 2001 recession.

Rates are already heading lower elsewhere in the world. Australia’s central bank surprised investors Tuesday by slashing its key lending rate by a full percentage point. Some effort to coordinate interest-rate cuts among other central banks is a possibility, particularly with annual meetings of the International Monetary Fund approaching this weekend in Washington.

Fed officials hoped the latest moves would restore market confidence, which has virtually disappeared since the collapse of Lehman Brothers Holdings Inc. in mid-September. Lower interest rates could reduce the cost of funding for businesses and individuals at a time of great financial strain. And the government intervention in the commercial-paper market could send a signal to money-market funds that it is still safe to hold these instruments.

In his remarks Tuesday, the Fed chairman played down the risk of inflation, noting that oil prices and other commodity prices are off their peaks, and U.S. import prices show signs of decelerating. He said that inflation expectations have held steady or eased.

But cutting interest rates further in the U.S. raises new questions. With rates already at 2%, they don’t have much further to go before they hit zero. The last time the Fed pushed interest rates lower than they are now, after the 2001 recession, the move helped set off the housing frenzy that ultimately led to the current crisis. Another speculative frenzy, however, looks highly unlikely today, with so much stress in credit markets.

A bigger potential problem is that cuts could prove ineffective — Japan’s interest rates stood near zero for more than a decade without substantially reviving economic growth.

Commercial paper is short-term debt, from overnight to a few months in maturity. It is typically purchased by banks or institutional investors such as money-market funds. Using Depression-era powers that allow it to lend to anyone under "unusual and exigent" circumstances, the Fed will set up a facility called a special-purpose vehicle that will purchase three-month top-rated commercial paper, which represents about $1.3 trillion of the market. It hasn’t lent to nonfinancial institutions since the 1930s and 1940s, and back then, it was on a smaller scale.

It said the facility will be up and running soon, and would continue buying until April 30, 2009, although that could be extended. It said the U.S. Treasury would make a "special deposit" with the Fed in support of the facility. Details of that deposit were still being sorted out Tuesday. According to one person familiar with the matter, the Treasury could help to finance the program by issuing additional short-term government bills, which it can leave on deposit with the Fed.

Issuers will pay the Fed upfront fees, or will provide guarantees or collateral, to help insulate the central bank from losses. If the Fed loses money on the loans, something officials say they don’t expect, U.S. taxpayers would lose, since the Fed’s gains and losses are turned over to the U.S. Treasury.

The commercial-paper market has contracted by 10% since July, to $1.607 trillion, as investors flock to safer terrain. Conditions in the commercial-paper market improved slightly on Tuesday, but some traders said volumes were lower than usual and it took them more time to sell debt to investors. Other segments of the credit markets, such as junk bonds, remained highly stressed.

Money-market funds, by some estimates, hold more than 40% of U.S. commercial paper outstanding. Last month, the Reserve Primary money-market fund, managed by Reserve Management Company Inc., "broke the buck," meaning it fell below $1 per share after suffering losses on holdings of Lehman Brothers commercial paper holdings. That prompted a "bank run" — investors fled from so-called prime money funds that hold commercial paper and flocked to safer money funds that invest in government securities.

Prime funds have seen $500 billion in outflows since last month, while government money funds have grown by $380 billion, according to research firm iMoneyNet Inc. It is the largest flight to government funds in any four-week measure in history, according to AMG Data Services.

The wave of redemption requests from investors has forced prime money funds to sell billions of dollars in commercial paper to raise cash, driving up interest rates on these instruments.

The problems are making it more expensive for many big companies to borrow. Two-week commercial-paper issued by aluminum producer Alcoa Inc. was trading to yield close to 7% on Tuesday. It usually trades at between 3% to 4%.

General Electric commercial paper maturing in December, which in normal times would yield 2% to 3%, was trading above 5% on Tuesday, according to traders. GE’s finance arm, GE Capital, is one of the biggest issuers of commercial paper. GE recently had around $90 billion of commercial paper outstanding.

GE announced plans two weeks ago to reduce its dependence on the market by next year to 10% to 15% of its debt outstanding. A spokesman welcomed the Fed’s move, saying it was "an important development that will improve confidence in the market and facilitate more lending."

Another big problem has been that firms have only been able to borrow for a few days at a time, if that.

AT&T, which had $8.5 billion in commercial paper outstanding at the end of June, said that for a two-day period around Sept. 18, just after the bankruptcy court filing of Lehman Brothers Holdings Inc., it only did overnight commercial paper. Currently, the telecommunications company says it has access to a range of maturities as long as 30 days.

Fed data indicate that more than 80% of U.S. commercial paper outstanding in early October was due to mature in one to four days. In normal times, that proportion is between 40% and 50%.

Fed officials have been especially concerned about the inability of firms to issue commercial paper for longer durations. By being stuck with overnight financing, many companies have effectively been operating with guns to their heads — at any moment, their financing could dry up.

Many firms have been scrambling to pare their exposures. Bank of America Corp., the giant Charlotte, N.C., bank, said late Monday that it had reduced its total commercial paper and other short-term debt outstanding to $145.8 billion on Sept. 30, down 18% from $177.8 billion in June.

The Federal Reserve has already stepped in to support a kind of commercial paper called asset-backed commercial paper, or ABCP, which is backed by collateral such as mortgage-backed securities or bonds backed by car and credit-card loans. Since announcing the program a couple of weeks ago, the Fed has acquired roughly $150 billion of ABCP assets from money-market mutual funds.

 

 

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Market Slide Puts a Spotlight on Big Oil’s Cash Hoard

By RUSSELL GOLD

Rising fears of a global economic downturn are sinking crude oil prices and driving down the share prices of major oil companies despite the industry’s record profits of the last two years.

Exxon Mobil Corp., the largest U.S. company and largest Western oil company by market capitalization, has lost 17% of its share price since January, its worst showing since 1981. Its smaller peers are doing worse. The stock prices ofChevron Corp., BP PLC, Royal Dutch Shell PLC, Total SA and ConocoPhillips, the largest western oil companies, all hit new 52-week lows during the day on Monday.

The stock drops are driven by concerns that a world-wide recession will bring an end to the high oil prices that have been the primary driver behind these companies’ record earnings. The other main way Big Oil boosts its profit — oil and gas production — "has not been growing," notes Credit Suisse analyst Mark Flannery.

Historically, oil demand rises and falls with the economy. A global recession would slow or reverse demand growth and deflate prices, pressuring oil companies to take one or more steps to boost their share prices. Analysts say these include acquiring another company to boost growth, increasing share repurchases, or offering a significant dividend increase.

Several of these companies, however, say they won’t change course. A spokesman for Irving, Texas-based Exxon says it is continuing on its long-term strategy of building value. "Shares do what the shares do," he said. A spokesman for London-based BP said, "We don’t manage the company day-to-day based on what’s happening to the share price." BP shares are down nearly 38% in the last 52 weeks.

The companies maintain brawny balance sheets, thanks to months of $100-plus oil prices, have ample cash and are seen as good credit risks. Moreover, their investments have been made based on much lower oil price assumptions. Unlike many smaller energy companies, they aren’t compelled to shed assets or cut their capital budgets to manage their cash. But sitting still isn’t a permanent solution. Current, low interest rates can mean poor returns on capital.

One large oil company that may need to change direction is ConocoPhillips. The Houston company needs to deliver $5 billion this month to Australia’s Origin Energy Ltd. under terms of a joint venture it entered into last month to produce natural gas for export.

Mr. Flannery argues that Big Oil will need to put cash into acquisitions to restore the battered share prices. So far this year, Exxon has lost $108 billion in market capitalization since peaking at $512.65 billion in January. Others analysts contend that Exxon and its peers can wait for a fire sale by troubled companies.

Compared with many blue chips, Exxon, Chevron and other oil majors are cash-rich. Exxon has $39 billion in cash and has been buying back shares at an $8 billion-a-quarter clip. The value of the stock it has repurchased is about $218 billion, a shade less than the current value of General Electric Co.

One possibility mentioned by investors would be for Exxon and Chevron to increase their buybacks to improve earnings per share. Energy analysts at Goldman Sachs and Merrill Lynch see longer-term oil market prices as remaining strong, allowing oil companies to buy their own shares while those prices are low. But this strategy is risky as oil companies have become political targets in the presidential campaign for not doing enough to boost supplies of oil and gas.

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Bailout Funding Promises To Pressure Treasury Prices

By MIN ZENG

Now comes the hard part: raising the money to pay for the U.S. government’s rescue plan.

Right now, there is good demand for low-risk U.S. Treasurys as investors around the world flee risky assets. The weakening economy adds to the allure of safe government debt.

 

But while those factors could help damp the rise in market rates that will come with the flood of fresh supply, long-term rates are still likely to rise, which could hurt the already struggling economy.

Even before the latest escalation in the credit crunch, the Treasury was considering ways to raise more money to fund the rising federal deficit. September’s bailouts of Fannie Mae and Freddie Mac, the loan to insurance giant American International Group Inc. and the backstops for money-market funds all added to the government’s cash needs.

Now comes the up to $700 billion Troubled Asset Relief Program to deal with toxic assets held by the banking system. As part of that package, lawmakers approved an increase in the federal debt ceiling to $11.3 trillion from $10.6 trillion.

As a result of all these actions, Merrill Lynch & Co. economists expect the budget deficit to reach $900 billion in the fiscal year that began Oct. 1. That is double the $407 billion deficit forecast early in September by the Congressional Budget Office for the just-ended 2008 fiscal year and the record $438 billion it expected for fiscal 2009.

Adding in debt that is maturing and must be rolled over, the Merrill economists see the Treasury’s total funding need at close to $1.5 trillion next year, a tally that economists at Goldman Sachs Group Inc. also have reached.

Raising that amount of money will require some creativity, and the Treasury has several options. It could bring back three-year, seven-year or 20-year Treasurys, or even introduce a 50-year bond. It could sell two- and five-year notes on a weekly, instead of a monthly, basis. And it could sell Treasury bonds on a one-time basis, explicitly earmarking the money to fund the bailout.

"They are going to have very large and very concentrated financing needs, which means they could go beyond the normal pattern of regular, predictable auction cycles," said Louis Crandall, chief economist at Wrightson ICAP LLC.

Ed McKelvey, senior economist at Goldman Sachs, thinks the Treasury should consider reopening "off-the-run" issues as a way of reducing its borrowing costs. Those are securities issued before the most recently sold bond of a particular maturity. Typically, these issues trade at a higher yield, and lower price, than the benchmark issue, because they are less frequently traded. But because of the supply concerns, off-the-run issues are trading at a lower yield than benchmark issues.

The Treasury Department already has increased the supply of bills and short-term notes this year to fund the rebate checks to consumers and to raise cash for the Federal Reserve’s liquidity efforts.

Despite the increase in issuance, demand for Treasurys has yet to falter. Foreign central-bank holdings of U.S. government debt stood at a record $1.5 trillion last Wednesday. And there is natural demand from long-term investors such as pension funds and insurance companies.

But the rise in supply will pressure yields, which will lead to higher rates on mortgages and other types of consumer and corporate borrowings. Already, the benchmark yield curve, or the gap between two- and 10-year yields, is at levels not seen since March. It stood Friday at 1.99 percentage points. David Ader, rate strategist at RBS Greenwich Capital, thinks the curve could steepen to 2.5 percentage points over the next months.

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Fund Outflows Could Result In Tax Hits For Investors

NEW YORK — Mutual fund investors, facing large losses due to the market downturn, may also be hit this year with a high tax bill as redemptions create capital gains for their funds.

As spooked investors pull their cash from stock funds — more than $110 billion so far this year, according to TrimTabs Investment Research — managers are forced to sell assets to pay them out. Often, the quickest way to raise cash is by selling high-valued stock, which creates capital gains liabilities for the fund that investors must pay at year’s end.

“It’s going to be the January surprise for a lot of people,” said Larry Glazer, founder of investment advisory firm Mayflower Advisors. “You could have a loss [on your fund investments] and significant capital gains distributions in the same year.”

The problem is made worse by the fact that funds have had high returns in the past few years, and have tried to mitigate capital gains hits by off-setting those gains with losses they suffered earlier this decade. But those off-sets have been largely used up this year, further increasing the chances of a tax charge.

“We’re headed for a 2000-like double-whammy,” said Tom Roseen, senior analyst at research firm Lipper. In 2000, stock funds on average lost 0.7%, but investors faced a tax bill of at least $31.3 billion, according to Lipper. That year, the fund industry had total assets of about $6 trillion; today, that figure is close to $12 trillion.
Stock funds are down an average 17.6% this year as of September 25, according to Lipper.
Moving out

Poor performance and fears about the market have seen investors leave stock funds and move into what they see as safer holdings, such as money market funds, Treasury bills and cash.
The problem is also created by fund rotations, as investors reacted to market performance and shifted from value funds and into core and growth strategies, said Roseen. They also dumped small-cap funds for larger-cap funds.

The issue may not be as bad as some fear, however.

“I’m not sure how big a deal it’s going to be,” said Adam Bold, president of the Mutual Fund Store. He said that many redemptions come when the Dow Jones Industrial Average is at a low, which means fund managers often aren’t selling high, which cuts the chance of realizing capital gains.

“A lot of managers will also at the same time sell positions in which they have losses to off-set any capital gains,” said Bold.

“I would love to see the industry do that, but I just don’t know if they will,” said Roseen. Not everyone does this, he said, as 2000’s large tax bill proved.

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Fed enhances liquidity tools, backs money funds

CHICAGO (Reuters) - The U.S. Federal Reserve has unveiled a raft of measures in recent months to enhance liquidity tools aimed at easing strains in credit markets that have been hammered by losses from subprime mortgages.

SHORING UP MONEY MARKET MUTUAL FUNDS, MORTGAGE DEBT

The Fed on Sept 19 said it will open its discount window to financial institutions to allow them to buy certain assets from money market mutual funds. Non-recourse loans will be offered at the primary credit rate to finance purchases of asset-backed commercial paper (ABCP). This should help funds that hold such paper meet demands for redemptions by investors and boost liquidity in the ABCP markets and broader money markets. The move came in step with a $50 billion pledge from the U.S. Treasury to bank money market mutual funds.

The Fed also announced plans to purchase federal agency discount notes from primary dealers. Those notes are short-term debt obligations issued by Fannie Mae and Freddie Mac, which were seized by the government on September 7, and the Federal Home Loan Banks.

INCREASE IN SWAP LINE WITH OTHER CENTRAL BANKS

The Fed on Sept 18 made an extra $180 billion available to other major central banks to lend to their local commercial banks in a bid to get U.S. dollars circulating in overnight and short-term money markets. The move brought to $247 billion the total amount of dollars the Fed was providing to other central banks, an almost threefold increase. The increased swap lines amount to up to $110 billion with the ECB, up $55 billion, and up to $27 billion by the Swiss National Bank, up $15 billion. New swap facilities were authorized with the Bank of Japan for up to $60 billion; the Bank of England for up to $40 billion; and the Bank of Canada for up to $10 billion. The swap arrangements were authorized through January 2009.

PRIMARY DEALER CREDIT FACILITY (PDCF)

The Fed said that “in light of continued fragile circumstances in financial markets” it would extend this facility until January 30. The measure, introduced on March 16 for an initial six months, allows investment banks overnight access to the Fed’s discount window for lender-of-last-resort cash. This was the first time since the Great Depression that the Fed had lent money directly to investment banks it did not regulate, and the move highlighted the gravity of conditions facing the financial system around the time of the rescue of investment bank Bear Sterns by JPMorgan Chase. Loans under the PDCF are collateralized by investment-grade securities.

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