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A $34 Billion Cash Fund to Close Up

Investors running for the exits have caused the closure of one of the largest U.S. short-term funds catering to institutional clients.

Columbia Management is shutting its Columbia Strategic Cash Portfolio, it told clients late last week, after facing major withdrawal requests from large investors. The fund, which held $34 billion at the end of November, has been split in two. Of the total, $21 billion has been put into accounts for the large investors who are seeking to cash out. An additional $12 billion remains in the fund, which will be wound down.

Columbia is a unit of Bank of America Corp., and Strategic Cash Portfolio was among its biggest products catering to institutional clients.

The fund’s closure spotlights spreading uncertainty among investors as they yank money out of “enhanced” cash funds like Strategic Cash Portfolio. Funds like these are designed to carry slightly more risk than money-market funds, which are traditionally among the safest investments around.

Though Columbia isn’t the only fund company struggling to navigate the credit-market turmoil, shutting such a sizable fund represents a black eye for the firm and for Bank of America.
Only some investors will be able to get their cash out. Several of the fund’s biggest investors are being redeemed “in kind” — that is, they have been given their share of the underlying securities, rather than a cash payment. Smaller shareholders can cash out at the fund’s share price, which is currently 99.4 cents on the dollar. The fund required a minimum investment of $25 million.

It is the latest crisis not only at enhanced cash funds, but also traditional money-market funds. Two weeks ago, Florida state officials temporarily shuttered an enhanced cash fund after investors pulled out billions of dollars amid concerns about the quality of its investments.
Last month, GEAM Trust Enhanced Cash Fund, managed by GE Asset Management, lost value partly because of its investments in some asset-backed securities. That $5.6 billion fund let investors redeem their money at 96 cents for every dollar invested.

All of this reflects the pressure placed on fund managers by the turmoil in the credit markets.

“Originally, investors hoped they would be treated like money-fund investors and the [fund] advisers would back them” in case the portfolios suffer losses, says Peter Crane, of Crane Data, a research firm specializing in money funds and other short-term investments.

“But GE created the precedent, he says. “And the management company has every right to pass the losses through.”

Chris Linehan, a GE spokesman, said “the investors in [GE Enhanced Cash Fund] understood that there could be volatility,” he said.

A report yesterday by Standard & Poor’s found that about 30 U.S.-oriented enhanced cash funds rated by S&P had lost a total of $20 billion, or 25%, of their assets, in the third quarter. In one of the more dramatic instances, one fund (which S&P declined to identify) saw its assets under management shrink by 98%, or $2.5 billion.

Even traditional money-market funds have felt pressure. In the past few months, at least a half-dozen financial institutions, including Bank of America, have taken steps such as buying the funds’ troubled securities to protect their money funds. These include FAF Advisors Inc., a unit of U.S. Bancorp, Credit Suisse Group‘s Credit Suisse Asset Management and Wachovia Corp.’s Evergreen Investments.

Money-market funds are required to maintain an unchanging $1-per-share net asset value; if they waver from that they are said to “break the buck.” Enhanced cash funds don’t have the same requirement. Nevertheless, investors generally expect them not to lose principal value.

Enhanced cash funds have grown in popularity as investors sought slightly higher yields amid historically low interest rates. They achieved added returns partly by investing in complex securities backed in part by mortgages and other assets. However, many of these, even those with high credit ratings, have collapsed in price. Spooked by these problems, investors have been fleeing enhanced cash funds.

“This exodus put more downward selling pressure on securities and some [enhanced] funds were forced to sell, causing further stress,” Standard & Poor’s credit analyst Jaime Gitler said in a report yesterday.

Officials at Columbia declined to identify specific holdings in the Strategic Cash Portfolio. A spokesman said the fund had exposure to troubled investments known as structured investment vehicles in line with other enhanced cash funds.

Losses on some of the fund’s investments led Bank of America to try to shore up the fund’s portfolio before it was decided to close it down, according to a person familiar with the matter.

The decision by officials at Columbia Management to close Columbia Strategic Cash Portfolio came last week. The fund had suffered $1 billion in withdrawals since the start of the month and several large investors in the pool were seeking to redeem investments. In the past, investors were able to buy and sell shares of the fund at $1 per share. But by last week the value of the portfolio had sunk below $1 per share, so it was no longer possible to cash investors out at that price without inflicting losses on remaining shareholders.

This means, says Mr. Crane, that Columbia is telling the large investors that “if you want to sell something and take a loss, that’s up to you.”

The spokesman said approximately 90% of the fund’s portfolio is investments carrying a rating of triple-A or double-A, the two highest-rating levels.

Bank analyst Jeff Harte of Sandler O’Neill & Partners described closing the fund as “not that big of a deal,” since it was an enhanced fund marketed to sophisticated institutional investors. “If you’re getting a premium yield, you’re taking a premium risk,” said Mr. Harte, who rates Bank of America a “hold.”

Bank of America had been holding up Columbia Management as a bright spot in its growing wealth-management division. But troubles have been building within the group.

Last month, Bank of America disclosed that it would provide support of up to $300 million for an institutional cash fund, and a similar amount to a separate group of money-market funds that own troubled securities. While Bank of America didn’t identify the affected fund at the time, people familiar with the matter now say it was Strategic Cash Portfolio. A Columbia spokesman said that in the firm’s continuing dialogue with individual investors and advisers, it explains that the money-market funds aren’t affected by what happened to the Strategic Cash product.