A SHORT-TERM INSTITUTIONAL BOND RUN MANAGED by General Electric Asset Management apparently has suffered losses in mortgage and asset-backed securities and is offering investors the option to redeem their holdings at 96 cents on the dollar.
The setback at GE Asset Management's GEAM Trust Enhanced Cash Trust is the latest in a series of problems encountered by money-market and short-term bond funds from the turmoil in the mortgage and asset-securities markets.
Legg Mason, Wachovia and Bank of America have had to provide financial support to their money-market funds to prevent their funds from "breaking the buck," or falling below the $1 asset value that money funds seek to preserve.
The GE fund, totaling $5 billion, is an "enhanced" cash fund, meaning it seeks to provide a slightly higher yield than a money-market fund while preserving principal and maintaining an asset value of $1 per share.
The fund has been willing to take more risk than a money-market fund by purchasing floating-rate mortgage and asset securities with high credit ratings. The bulk of the money in the fund comes from GE's pension trust and other GE employee benefit plans.
In a Nov. 8 e-mail to institutional holders of the fund, GE Asset Management cited "extreme conditions in the credit markets" and told investors that "it will soon begin to sell certain securities held in the Fund which will result in realized losses and likely bring the Fund's yield to zero."
In the e-mail, GE Asset Management said the fund has "sufficient liquidity to redeem all non-GE subscribers at the current net asset value (.96) but there can be no assurance that this will continue to be the case at any point in the future as the difficulties in this market persist." Outside institutional investors therefore face a 4% loss on their holdings. GE said it plans to soon redeem $250 million from the fund and may liquidate additional holdings in the future.
Based on information on GE Asset Management's Website, the enhanced cash fund has about 27% of its assets in home-equity asset-backed securities, 23% in residential mortgage securities and the rest in a mix of securities, including credit-card securities and corporate bonds. This information is as of June 30.
The 4% loss suffered by outside investors is sizable relative to the added returns that the fund generated relative to short-term investments. The one-year return on the fund through June 30 was 5.49%, versus one-month Libor of 5.39%.
In response to the Barron's inquiry, GE Asset Management said in an e-mail statement that it has "ceased taking new investments" in the fund "based on our belief that recent extreme conditions in the credit markets, including liquidity concerns and value dislocations, will continue in the foreseeable future."
GE's pension and benefit plans could suffer additional losses in the fund as more securities are liquidated. It's unclear whether GE Asset Management plans to wind down the fund.