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Could a Rising PPIP Tide Lift Your Bond Fund Boat?

What the Treasury's Public-Private Investment Program could mean for mutual fund investors.

Michael Herbst 20.05.2009

The answer depends on whether your boat was skimming the waves in 2008, took on a little water, or sank to the bottom of the ocean. The U.S. Treasury Department is set to announce the first five asset managers to participate in the Public-Private Investment Program, or PPIP (pronounced pee-pip), in coming weeks. Those eligible to participate are likely to include the likes of bond heavies such as PIMCO, BlackRock, or Western Asset Management. Given such firms' high profiles in the fixed-income world, and given the government's intention to reach out to a broader swath of investors in its efforts to bolster capital markets, it is a natural question to ask what PPIP means for bond mutual fund investors.

The answer has several parts and is likely to evolve in coming months. PPIP and its cousin, the Term Asset-Backed Securities Loan Facility, or TALF, are intended to resuscitate several pockets of the bond markets that essentially shut down in 2008. PPIP and TALF will focus on bolstering the markets for nongovernment mortgage-backed and asset-backed securities. Treasury's goal for the five initial asset managers is for each to bring at least $500 million to the table in relatively short order. Treasury then intends to match that funding 1:1, meaning that at least $5 billion could begin to pour into market over the summer. Treasury may bring even more resources to the table by expanding TALF to include certain kinds of commercial and residential mortgage-backed securities, and make the funding available to investors well beyond the initial five (an expansion becoming known as TALF 2.0).

No Use Trying to Push Square Pegs into Round Holes
Investors looking for PPIP-oriented open-end mutual funds aren't likely to find any. That's because the government's financial investment alongside the initial participants involves an aspect of leverage that doesn't jibe with the Investment Company Act of 1940. In addition, even with the help of new PPIP cash, the securities in the spotlight are likely to remain quite illiquid and could present challenges for open-end fund managers who need to be able to accommodate investor redemptions. As a result, the initial PPIP asset managers are discussing limited-partnership investment vehicles more akin to hedge funds or private equity investments than open-end offerings for retail investors.

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About Author

Michael Herbst  Michael Herbst is an associate director of fund analysis with Morningstar.

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