Newton funds on credit watch after $4bn top-up

Mellon Financial, one of the US's largest financial services companies, has injected $4m (£2.7m) into one of its funds after what was meant to be an ultra-safe investment was dramatically downgraded from AAA to D by Standard & Poor's.

The credit ratings agency slashed the rating of the Newton Corporate Money Fund, which is managed by Mellon's London-based subsidiary Newton Investment Management.

Standard & Poor's has now warned that three other triple A-rated Newton funds might be downgraded if it is not satisfied with the funds' management practices.

The $170m Newton Corporate Money Fund, which is based in Jersey, went from AAA to D overnight last Tuesday after Standard & Poor's became increasingly worried about one of its holdings, debt owned by the US insurer Allmerica Global. Fears were circulating in the market that Allmerica might not be able to repay the debt.

The Newton Corporate Money Fund was meant to be one of the safest forms of investments for institutional clients. A money fund is intended to pay out to investors the same amount of capital as they have paid whenever they request their cash back.

The Newton fund received a severe downgrade because of the decline in value of its $14m Allmercia holding. When Newton sold out of this investment on 15 October, it received only 70 cents for every dollar. The reduction in value dragged down the overall fund by 2.36 per cent.

James Tew, the head of European ratings services for Standard & Poor's said: "The fund lost some of its principle value, which automatically triggered the need for a rating of D, because this means a fund has failed to maintain its principle value."

Mellon stressed that while the company has made up the loss by investing $4m, it had not been forced to do so, because this type of fund does not guarantee a fixed return.

But most investors expect a certain return. All funds in this category that have in the past lost some of their principle value and been downgraded by Standard & Poor's have received cash injections from their parent companies.

A spokesman for Mellon said: "We have done nothing wrong. But it is extremely important for Mellon to have a good, solid reputation in the market." Newton has also replaced the manager of one of the funds on Standard & Poor's creditwatch list.

The company rejected the possibility that more of its low-risk funds would be downgraded. It expects one, Universal Sterling, to be reaffirmed as a triple A-rated fund today and is confident the others will also win back the premium rating.

It has also not asked for the Corporate Money Fund to be re-rated after the injection of capital. Investors in this fund will now not lose any money but its investment mix would now probably not meet the complex requirements needed to attain a triple-A rating.

Standard & Poor's rejected charges that it was forced to downgrade Newton Corporate Money so dramatically because its analysts had been slow to pick up problems there.

Mr Tew said: "It is standard practice to allow the management a short period of time to deal with the situation."