Thursday, April 17, 2008

The flight to safety is real.

The Investment Company Institute reports that money market funds hit a new record at the end of March with $3,500 billion under management. This is 44% more than a year ago.

But the dividend problem we just walked through is sneaking along this cove of safety, too. What's in Wells Fargo's money market fund? Bonds from Wachovia, Citibank and Bank of America-three institutions under pressure-make up three of its top 10 holdings. Fidelity Select Money Market invests more than a fourth of its holdings in the financial services industry.

Most of the top money market funds that had invested in mortgages and structured investment vehicles last fall have gotten out of them now. But that still leaves many of them with holdings in assets like bank bonds that can lose value. And with the astounding wave of new money that has washed into these funds, the competition is on for the small pool of high quality assets these funds can (or should) hold.

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