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Funds Give Katrina Relief in Form of Fee Waivers


In the wake of the damage caused by this summer's Hurricane Katrina, at least two fund advisors, ING Funds and The Reserve Funds, have been providing relief to victims in the form of direct, albeit temporary, fee waivers.

In obvious recognition that hurricane victims might need to tap their fund investment accounts, ING of New York notified investors in mid-September that through the end of October, it would waive the contingent deferred sales charge (CDSC) for investors of several Katrina-devastated cities and parishes. This applied to residents of 64 parishes in Louisiana, 52 counties in Mississippi, 10 counties in Alabama and three counties in Florida. In mid-October, residents of four other Alabama counties were also granted immunity.

But ING was quick to note that the CDSC waiver would not apply to exchanges between funds, nor to already-established periodic withdrawals. Executives at ING declined to comment for this article.

The Reserve Funds of New York, sponsor of the only Louisiana municipal money market fund in existence, has been waiving the fund's comprehensive fee since Oct. 1 and will continue to do so through the end of the year.

The fund operates with a 1% all-inclusive fee from which it pays the fund's management fees and all other usual operating expenses, such as transfer agency, fund accounting and custody costs.

"We are running the fund for nothing right now," affirmed Bruce Bent II, vice chairman and president of the fund group. The fund, which is only one-year-old, is still a fledgling with a tiny $1.2 million in assets as of early November.

Reserve took up the call to action specifically because of its unique position as the manager of the state's only dedicated muni-money fund. "That uniqueness transferred to some degree to an obligation to help the state of Louisiana rebuild," said Bent. "They're going to be issuing debt, and we'll be one of the buyers, so we said, what can we do to speed up the process?"

The money fund advisor is hoping that its fund waiver will help draw in investors and send a clear message to distributors that this unique fund exists. "This is a token to try to put the state on the radar screen and give it some visibility," Bent conceded.

But 65% of all money funds waive all or a portion of their fees at one time or another, said Pete Crane, vice president and managing editor of iMoneyNet of Westborough, Mass. "It is definitely altruistic of them, but it is easier to waive fees on small funds," Crane conceded.

Reserve may actually be in exactly the right place at exactly the right time within its Louisiana niche, he added. Katrina victims may be expecting big fat insurance checks and may want to find a likeable fund to stash the money in until they decide what to do with it longer term. In addition, there will likely be a boom in Louisiana debt issuance, which should carry an attractive rate of return in order to appeal to investors, Crane said.

Plans to issue new bonds as well as how to tackle current outstanding state- and municipality-issued bonds are still in the works, noted Jeff Tjornehoj, a research analyst with Lipper of New York. "These bonds did suffer in the wake of the hurricane, but there's been a rebound since," he said. There could be a quantity of bonds that end up being issued in order to rebuild Louisiana's infrastructure, and they very well may resemble the Liberty bonds that were issued in the wake of the Sept. 11th terror attacks to rebuild downtown New York, he said.

That Liberty bond characterization could make them easier to market to investors, Tjornehoj said. In addition, these bonds could be granted immunity from the alternative minimum tax, an income tax originally designed for the wealthy, which could attract big muni investors, he added.

A plethora of large new issues is exactly what municipal fund portfolio managers are hoping for in Louisiana and other hurricane-ravaged states. There are only a few single-state muni-mutual funds that invest solely in Alabama, Mississippi or Louisiana, according to Lipper, although national muni funds diversify across multiple states.

New debt securities sporting a premium interest rate would be good news, said Thomas Moles, lead manager of the municipal team at J&W Seligman in New York, which manages the firm's Louisiana muni fund.

But muni fund managers are also grappling with what to do with the current bonds they now own in their funds, especially for those issues that do not carry insurance, and what impact the uncertain muni market will have on their funds' net asset value. Those, like J&W Seligman's, whose muni funds' bond portfolios are insured in large part, will likely have a lesser impact.

But the roller coaster ride may be far from over.

Last week, Fitch Ratings issued its third downgrade of specific muni bonds for New Orleans and surrounding parishes, including those for the Sewerage and Water Board of New Orleans and the city's Audubon Commission, which funds New Orleans' aquarium. A possible second downgrade on the city's Exhibition Hall Authority will be up for consideration within the next two weeks, said Steve Murray, Fitch's director of public finance.

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