Mellon’s decision came after Newton Investment Management Ltd., its London- based subsidiary, disclosed earlier in the week that the US-dollar class of the Newton Corporate Money Fund had lost 2.39% of its unit value because of a soured investment in a note issued by Allmerica Global Funding LLC, according to Dow Jones.
By making up for the fund’s $4 million loss, Mellon is preventing an unprecedented loss of principal by investors in an offshore money market – an increasingly popular cash management tool used primarily by institutional investors.
Investors now have $180 billion parked in AAA-rated offshore money funds, up 29% from the beginning of the year, according to iMoneyNet Inc., a money fund tracker.
Following the disclosure of the loss, Standard & Poor’s Funds Services lowered its rating on the $170-million Newton dollar fund to Dm — meaning the fund has failed to maintain principal value — from triple-Am, and put Newton’s euro- and sterling-denominated funds on CreditWatch with negative implications, Dow Jones said.
A Mellon spokesman said that the outflows of investor money from the Newton fund since the loss was disclosed have been “minimal.”
“This is an unfortunate but important reminder that money funds can lose money, even though it rarely, rarely happens,” Peter Crane, vice president and managing editor of iMoneyNet of Westborough, Mass., told Dow Jones.
In the US, the only case where investors in a money fund lost money occurred in 1994 when Community Bankers US Government fund shut down after suffering derivatives losses.