Fidelity opts for program guaranteeing money funds

Fidelity Investments and Vanguard Group Inc., two heavyweights in the money-market mutual fund industry, said yesterday they will apply to participate in a temporary federal guarantee program to prop up the $3.4 trillion money-market fund industry.

With a sign-up deadline looming today, Boston-based Fidelity and Valley Forge, Pa.-based Vanguard had been key holdouts among major fund firms considering participation. Nearly all of Fidelity's and Vanguard's major money-market fund rivals had disclosed plans over the last few weeks to participate.

Fidelity and Vanguard said all their funds remained strong, and are unlikely to ever require federal insurance to protect investors from any losses. But the firms decided to have all their money-market funds apply to participate in the fee-based program as an extra layer of protection amid volatile markets.

Vanguard chief investment officer Gus Sauter said his company's participation "will remove some uncertainty in the minds of investors, and we think our shareholders will agree that taking part is the right thing to do."

Fidelity says it manages more than $431 billion - including its largest fund, the $127 billion Cash Reserves - in money-market mutual fund assets. Assets in Vanguard's 11 money-market funds stood at $193 billion at the end of last month, led by its largest, the nearly $103 billion Prime Money Market.

The Treasury Department on Sept. 19 disclosed a guarantee program for the $3.4 trillion held in money-market fund assets after investors pulled out some $170 billion in a seven-day period. The run was triggered when Reserve Management Corp.'s Primary Fund "broke the buck" Sept. 16 - meaning its assets fell below the level needed to cover every dollar invested - triggering fears about money funds' safety and exposing investors to losses.

Firms managing eligible funds that agree to pay the fees will obtain guarantees via the government's $50 billion Exchange Stabilization Fund, extending protection similar to FDIC insurance for bank savings deposits. The upfront fees amount to $1 for every $10,000 of money fund assets.

For now, the guarantees extend only three months. After that, Treasury will consider market conditions before deciding whether to end or renew. The guarantees cover only funds held in eligible money-market fund accounts as of the end of business Sept. 19, so money put in since then isn't guaranteed. Funds that broke the buck before that cutoff - such as Reserve Primary - aren't covered.

If assets in a covered fund fall below $1 per dollar invested, customers will be notified that their fund is covered by the insurance program.