GLOBAL - Putnam Investments has been forced to close its prime money market institutional fund and return the assets to investors, just as consultants warn money market fund liquidity could be the unintended victims of this week's market turbulence.

A statement issued by Putnam reveals trustees of the fund closed it to new members on Wednesday 17 September and began distribution of its assets as it faced liquidity issues in the market.

Officials are keen to stress the decision on its institutional fund - which requires minimum investment of $10m (€1.7bn) - was made not because the portfolio's credit quality is under any pressure but because it was unable to obtain the liquidity it may need to achieve investors' returns and investors were creating "significant redemption pressures".

"Serious constraints on liquidity in money market instruments created the risk that in order to process redemptions, the fund would realise losses in selling its portfolio securities. In the face of these challenges, the Trustees determined to close the fund to ensure equitable treatment of all fund shareholders,:" said Putnam.

Fitch, the ratings agency, has moved to state other money market funds with AAA/V1+ ratings are secure, though it has placed the Putnam fund under review.

However, this latest development came just as consultancy Redington Partners warned pension funds to check the make-up of money market funds they invest in, as some such funds are investing in more than fixed income in order to achieve LIBOR returns..

Robert Gardner, partner and co-founder at Redington, said money market funds therefore find their returns do not meet their target if liquidity of derivatives and other associated vehicles dry up.

"People are having to invest the cash through these products but the assets behind them may not just be in cash, increasing the risk," said Gardner.

"The banks are trying to work out what the assets are worth, but if they keep writing down the value you have to re-mark too as everyone else revalues their assets.

"Pension funds need to make sure they understand all your risks but the damage has already been done. The take away now is make sure you manage and monitor your risk," he added.

Putnam is now working with the fund's trustees "to develop a detailed plan of distribution, with the goal of providing shareholders with the opportunity to receive distributions as expeditiously as possible, depending on market conditions".

It is not acting in the same way, however, concerning the retail Putnam money market fund, its VT money market fund or others used by defined contribution clients.

What general impact has this week's turmoil had on your pension scheme assets or those of your clients, and are there any long-term implications? If you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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