3. Sovereign risk is the risk that your customers will get tangled up in the economic affairs of foreign countries. Sometimes a client's asset allocation will need some foreign equity exposure, and doing that with eyes open can make sense. Most financial advisors and fewer clients understand that money market funds are taking foreign risks by investing the CDs foreign banks. Right now the ten largest fund companies have lent two banks more than $50 billion of U.S. investor money when these banks are demonstrably of lower credit quality than many U.S. Banks. The more foreign investment the higher the risk of the money market fund.
The chart below displays our rankings of the top 10 money market fund families based upon the first two criteria, % of Treasuries and Govies versus total, and institutional ownership. In this case the Treasuries and Govvies are the difference between the "thinly held" percentage (a label for what is NOT Treasuries, etc.) and 100%.
Information about foreign holdings you have to get the old-fashioned way for now: by looking at the fund's holdings report and digging for the numbers. Fund companies lump foreign bank CDs in with Domestic Bank CDs!
A last piece of advice. Any analysis is better than none. Clients will forgive making mistakes in tough investing environment , but not being lazy or uninformed.
Richard Heitman is president of Heitman Financial Services Consulting (www.heitmanfsc.com) in Minneapolis. He can be reached at [email protected] or (612) 590 8634.