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Commercial paper woes may hurt money funds


Some Canadian money market funds are holding troubled asset-backed commercial paper, but it is unclear if investors will suffer losses in what are traditionally safe investments.

"It is not clear at this point really how much is at risk in any of these funds," Dan Hallett, a Windsor, Ont.-based fund analyst, said yesterday. "Money market funds are sold really as safe vehicles."

Toronto-based Coventree Capital Group Inc., a bundler of debt from other companies, is one player that has fallen victim to a global credit crunch, and was unable to fund repayment of $250-million in notes due this week. The debt is bundled with flashy names like Rocket Trust and Apollo Trust.

"A lot of mutual and segregated funds hold one or more of the Coventree trusts, but don't hold a lot of them - under 10 per cent," Mr. Hallett said. "But there are other names that might fall in the same category."

Investors should find out if their funds hold any of the troubled commercial paper, and whether they will cover any potential losses, he said.

In the past, some fund companies have covered any losses in money market funds caused by yields falling below the management fees, but this is different, Mr. Hallett said.

Segregated funds seem to have more of the Coventree trusts compared with mutual funds, but the former provide at a minimum a 75-per-cent guarantee of their initial investment at maturity or death of the policy holder, he added.

David Balsdon, a vice-president and secretary-treasurer of Mavrix Fund Management Inc., said his firm has two money market funds that hold Coventree paper, but they represent less than 10 per cent of the holdings.

"There is going to be no impact to our unitholders," because Coventree has extended the maturity date for its commercial paper, said Mr. Balsdon. "It's not a default thing. We will get our money."

Michael Quigley, a senior vice-president of distribution at Natcan Investment Management Inc., would only say the unit of National Bank of Canada and manager of its money market funds, is "monitoring the situation."

André Chapleau, a spokesman for Groupe Desjardins, said the Desjardins Money Market Fund has a small exposure to Apollo Trust, a Coventree offering, but the firm is not concerned because bond rating agency DBRS Ltd. has reconfirmed its double-A rating.

Michel Naud, manager of investor relations for Industrial Alliance Insurance and Financial Services Inc., said his firm's fund managers are examining exposure to commercial paper from Coventree and other parties in both its segregated money market funds and those run by its mutual fund arm, IA Clarington Investments Inc.

"They are still assessing the situation, and then we will be in a better position to talk about the risk for our investors," Mr. Naud said.

© 2007 The Globe and Mail. All rights reserved.

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