In a development likely to spark debate over the risks of fund management for banks, BankAmerica Corp. has pumped millions into a proprietary mutual fund to stanch losses.
The San Francisco-based banking company is the first bank to join the handful of mutual fund companies that have propped up portfolios in recent months.
The cash infusion to a $4.7 billion-asset money market mutual fund managed by the company's lead bank will not have a material financial impact on the holding company, nor will it negatively affect investors in the fund.
Indeed, the move was designed to protect investors from losing principal in a type of mutual fund that has been pitched for years as a safe alternative to to interest-bearing deposit accounts.
But the incident highlights a financial risk that many banks eager to get into the mutual fund business may have overlooked -- namely, that bank advisers may be compelled to bolster proprietary funds in times of market turmoil, even funds said to pursue conservative investment strategies.
Black Eye for Banks?
The move also raises questions about BankAmerica's investment management policy in the fund that required the infusion.
"It's the kind of news that has the potential to damage the reputation and credibility of the industry," said Thomas H. Nevin, president and chief investment officer of PNC Institutional Management Corp., Wilmington, Del.
The fund that required the infusion was BankAmerica's Pacific Horizon Prime Money-Market Fund, which is marketed to both institutional and retail investors.
A BankAmerica spokesman confirmed a report in Friday's Wall Street Journal that the bank-holding company added $17.4 million in capital to the fund in early May.
The infusion was forced by the upticks in interest rates earlier this year, which caused larger-than-normal redemptions as institutional investors shifted to Treasury securities, a bank official said.
Fund Forced to Sell Assets
To cover the demand for cash, the fund was forced to sell commercial paper, government agency instruments, Treasuries, and "some derivatives" before maturity, the official said.
So much money was lost that the fund would have been forced to break with convention by reducing its share price to below $1 if the cash infusion had not been made.
BankAmerica is not the only fund manager to bolster a money fund this year. Officials of the Securities and Exchange Commission said that several such infusions have been made to other money funds.
High-profile cash infusions have been made recently by Piper Jaffray Cos. and PaineWebber to bond funds.
David Apgar, senior policy adviser to the comptroller of the currency, in Washington said that there have been a handful of similar cases involving bank-managed money market and fixed income mutual funds in the past three or four years. Bank of California was desciplined by the SEC last year for mispricing a fund.
Risk of Derivatives Cited
Industry sources said the incident underscores the riskiness of derivative investments. Although a BankAmerica spokesman said the fund's derivative investments were within regulators' guidelines, fund experts questioned that, and SEC officials have questioned whether some funds are following the rules.
Furthermore, some wondered if bank regulators have been vigilant enough in monitoring fund activities.
By focusing almost exclusively on banks' mutual fund sales practices, regulators "have really missed the boat on where the real exposure to problem lies," said Donald W. Smith, a law partner with Kirkpatrick & Lockhart, Washington.
"The real need is for more attention to portfolio management practices," Mr. Smith said.
