Link to Fitch Ratings' Report: Standard VNAV MMFs Gain Momentum Diverse Investment Strategies Challenge Market Segment Understanding https://www.fitchratings.com/site/re/887515
European standard money market funds are gaining momentum, but the range of investment strategies is leading to wide disparity in credit risk, Fitch Ratings says. This poses challenges for investors.
Standard MMFs are variable net asset value (VNAV) funds, which are classified in the longer MMF category (up to 12 months' weighted average life) under European regulation. Investor demand for this product has been growing over the past couple of years. We estimate they represented about 35% of European MMF assets at end-August 2016, up from only 30% two years ago, as Continental European investors shifted from short-term MMFs (less than 120 days' weighted average life) to standard. We expect this shift to continue as standard MMFs may appeal to investors as a complement to more conservative, lower-yielding money funds, especially in the current ultra-low euro yield environment.
Low investment-grade assets are frequently held in European VNAV funds and most notably in standard MMFs, where two-thirds of funds invest in 'BBB' or 'BBB-' securities. But there are substantial variations in the actual fund allocation to such securities, resulting in funds having materially different credit risk profiles. For example, funds had on average 2% exposures to 'BBB' securities at end-June 2016 according to Fitch's latest study, with allocation ranging from 0% to well above 50%. Supply opportunities in non-financial corporates and yield pick-up opportunities are key drivers of funds' allocation to low investment grades.
Portfolio liquidity management practices vary greatly among standard VNAV MMFs, with average allocation to assets maturing within a week at 9%. Most of them would have to raise their portfolio liquidity under the latest proposed European MMF regulation revisions from the Council of the European Union, which would require 15% in weekly liquid assets. The proposed regulation is now in its trilogue phase, where European institutions need to agree on a final text.
Fitch's presentation on European MMFs from Crane's 2016 European Money Fund Symposium is available at www.fitchratings.com or by clicking the link above.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Charlotte Quiniou, CFA
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