Investors flee California debt funds

Electricity buying leads to $3.5 bln outflow, analyst says By Craig Tolliver, CBS.MarketWatch.com Last Update: 2:40 PM ET May 23, 2001 NEW YORK (CBS.MW) -- California's energy crisis sent a shockwave through California tax-free fixed-income funds as investors yanked out $3.5 billion last month in anticipation of the state's costly debt-financed electricity purchases on behalf of two cash-strapped utilities, fund analyst Lipper Inc. said Wednesday.

As politicos battled out strategies to deal with ailing Pacific Gas & Electric (PCG: news, msgs, alerts) and Southern California Edison (EIX: news, msgs, alerts) , California money market funds, representing $35 billion in assets, shed $3 billion in April, or 8.6 percent of assets. This compares to outflows of $420 million the month before.

California bond mutual funds, with $42 billion in assets, reversed course, leaking $500 million in April after pulling in $241 million in the previous month.

In April 2000, California money market funds were stripped of $2.5 billion in assets, attributable to larger than usual tax payments on strong 1999 market gains, Lipper said.

Coupled with strong outflows from California bond funds, it becomes clear that California's deteriorating credit worthiness is a growing concern among investors of California fixed-income products.

"Investors are very sensitive to events. When we start comparing California to other major states there is a pattern there. Performance in those funds for the month was more negative than the performance in bond funds elsewhere. The market is intelligent and is watching the news," Lipper's senior research analyst Don Cassidy told CBS.MarketWatch.com.

California funds represented only 3.8 percent of all tax-exempt mutual fund assets but suffered 29 percent of the nationwide net outflow in such portfolios.

Tax-exempt money market funds investing in New York, for instance, only saw outflows of $815 million for the month, or just 3.6 percent of more than $22 billion in assets. Bond funds investing in the state reported inflows of $35 million.

Last week, Moody's Investors Service cut ratings on California's $20 billion of general obligation bonds and $5.7 billion of lease revenue bonds and said the state's credit outlook remains negative. See full story.

The debt-rating agency said the move reflected increasing financial risks stemming from the state's energy crisis as well as broader concerns about economic conditions in California and the U.S. as a whole.

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-- Martin Thompson (mthom1927@aol.com), May 23, 2001