Friday, October 3, 2008

NEW HAVEN, Conn. | An investment fund that serves about 1,000 colleges and private schools partially froze withdrawals this week amid the credit crunch, forcing colleges to develop new plans to pay bills.

Wachovia Bank, trustee for the $9.3 billion Short Term Fund offered by CommonFund, said Monday it was terminating the fund and establishing a process to ensure the orderly liquidation and distribution of the fund’s assets. Wachovia initially told investors that they could only withdraw 10 percent of their money, but that figure was increased to 34 percent by Wednesday.

The move was designed to prevent a run on money and to protect investors, said Laura Fay, a Wachovia spokeswoman.

“It was not something we took lightly,” Ms. Fay said. “In this environment, we felt this was the best way to proceed.”

The fund, which provided returns slightly above U.S. Treasury bills, is offered by CommonFund, a Wilton, Conn., nonprofit that advises colleges and schools on money management.

About 85 percent of the fund was invested in high-quality commercial paper from blue-chip companies, while the rest is in securities backed by mortgages and other assets, said Keith Luke, managing director of CommonFund.

Amid the housing industry slump and turmoil affecting banks and credit markets, such investments have become increasingly unpopular as investors seek safer options like Treasury bills.

Commonfund said recently volatile markets have hurt the 15 percent to 20 percent of the Short Term Fund’s portfolio held in mortgage- and asset-backed securities.

There have been no defaults in the fund’s portfolio so far, Mr. Luke said.

“Credit markets have frozen, which has made trading of even the highest quality short-term financial assets impossible at virtually any reasonable price,” CommonFund wrote in a letter to clients Wednesday. “In light of these markets, we believe that the trustee feared that a sudden increase in redemptions could force a liquidation of securities in a frozen market and decided to take pre-emptive action.”

Commonfund said it pledged $50 million of its corporate reserves in April to back the fund.

Ms. Fay said Wachovia’s decision was not affected by last week’s announced $2.1 billion deal for Citigroup to buy Wachovia’s banking operations.

Wachovia’s decision to slowly liquidate the fund is designed to prevent a rush by investors. When a fund sees such a rush, fund managers must sell assets — typically at a loss when it must be done quickly, and especially amid the recent market turmoil.

A slow liquidation helps protect investor returns and ensure each investor would be treated equally.

By the end of the year, investors in the Short Term Fund will be able to withdraw at least 57 percent of their money, Mr. Luke said. Asked whether investors will ultimately get all their money back, he said, “We certainly expect that.”

CommonFund is working with the colleges and schools to help them find alternative sources of financing, Mr. Luke said.

“We feel terrible for them,” Mr. Luke said. “We want to help them. We’re working very hard to do so.”

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