EFAMA, the European Fund and Asset Management Association and the trade group for European mutual funds, recently published its annual "Fact Book," which includes a wealth of statistics on European funds and a section on European money market funds. A press release entitled, "2023 a record-breaking year for ETFs, EFAMA’s latest Fact Book shows," tells us, "EFAMA … published its 2024 industry Fact Book. This year's edition includes a foreword by EFAMA President, Sandro Pierri, in-depth analyses of trends in the European investment fund industry (for 2023 and over the longer term) and an extensive overview of regulatory developments across 29 European countries. It also contains a series of info-boxes addressing some important regulatory issues EFAMA is actively working on, including DORA, ELTIF, ESG ratings, withholding taxes, retail investment, sustainability disclosures, global fund distribution and T+1 settlement." See the full EFAMA 2024 Fact Book here. (Note: Please join us for our European Money Fund Symposium, which is Sept. 19-20, 2024 in London, England. Registrations are being accepted and our discounted hotel rate expires August 14.) (Note too: We haven't published our monthly Form N-MFP summaries and data set yet due to changes in the SEC's file formats. Watch for this data to be posted in coming days once we've fixed our programs to adjust for the myriad changes which went into effect this month.)

EFAMA Director General Tanguy van de Werve comments, "This year's Fact Book shows that UCITS are delivering good returns with costs declining, attracting both European and foreign investors. While this is good news for the financial wellbeing of those investors, there are still far too many European households not reaping the benefits of investing in capital markets. This is a pivotal year of change within the EU institutions, with clear recognition from policymakers that we need to encourage more retail investing to address the pension gap and support economic growth. To achieve that, we need decisive actions that simplify investing, cut red tape, and move us closer to a Savings and Investments Union."

The section on "UCITS money market funds," explains, "Net assets of money market funds (MMFs) ended the year at EUR 1.7 trillion. In terms of net sales, they attracted net inflows of EUR 170 billion over the full-year 2023. These figures marked the second-highest net sales of the decade, behind the record net sales of pandemic year 2020 (EUR 215 billion). The primary driver behind the 2023 inflows was the reversed yield curve for much of that year, both in Europe and the US. An inverted yield curve indicates that short term interest rates are generally higher than long-term rates, resulting in a higher yield for those funds investing primarily in short-term products such as MMFs, hence their appeal to investors…. Net asset growth of MMFs amounted to around 11% in 2023. Compared to long-term UCITS, MMF asset growth is essentially driven by net sales, as the valuation of the short-term instruments held by MMFs varies little over time. Net sales accounted for virtually the entirety of the 2023 net asset growth. In other years, however, exchange rate effects can have an impact on MMF asset growth."

EFAMA states, "Changes in short-term interest rates significantly impact the demand for MMFs. MMFs mainly invest in very short-term debt, often with a maturity of less than one year. Hence when short-term interest rates rise, MMF yields also tend to increase, making them more attractive to investors. This correlation was less evident during 2016-2021, when rates were negative, but became distinctly apparent again in 2023. Demand for MMFs is, however, also influenced by other factors, in particular their use as a 'safe haven' investment in times of crisis. This was clearly illustrated in 2020, when short-term rates hardly moved, but the uncertainty caused by the COVID-19 pandemic led to record MMF inflows."

They write, "Net sales of MMF UCITS by type of SFDR fund indicate that net inflows in 2023 were concentrated in Article 8 funds, amounting to EUR 110 billion -- as in 2022. Compared to long-term UCITS, net flows into Article 9 funds were close to zero in both years, as there are scarcely any Article 9 MMFs.... MMF costs fell from 0.17% in 2019 to 0.10% in 2021, before increasing to 0.16% in 2023. This level of ongoing charges remains very low compared to the costs of most long-term funds.... The performance -- net of costs -- of MMF UCITS tends to be lower than that of longer-term UCITS, given their shorter investment horizon and asset allocation. The exception was 2022, when MMF returns remained positive (1.6%), while all long-term UCITS saw negative returns."

EFAMA's Fact Book continues, "The MMF market is highly concentrated in three main domiciles. Ireland has the largest market share of UCITS MMF net assets at 42%, followed by Luxembourg at 29% and France at 24%. Combined, these three countries account for 95% of the European total at end 2023."

It says, "The EU MMFR ('Money Market Fund Regulation') was adopted in 2016 and came into full effect in January 2019. The MMFR distinguishes between three main categories of MMFs: Public Debt Constant Asset Value (PDCNAV) MMFs; Low Volatility Net Asset Value (LVNAV) MMFs; and, Variable Net Asset Value (VNAV) MMFs. Aside from these categories, the MMFR also distinguishes between Short-term and Standard MMFs. Short-term MMFs are required to adhere to tighter investment rules than Standard MMFs. All three types can be categorised as Short-term MMFs; Public Debt CNAV, LVNAV and Short-term VNAV. Standard MMFs must be variably priced, therefore only VNAV can be Standard MMFs."

EFAMA explains, "PDCNAV and LVNAV MMFs use amortised cost accounting -- provided certain conditions are met -- to value all their assets and to maintain a net asset value (NAV) or value of a share of the fund, at EUR1/GBP1/USD1. Public Debt CNAV MMFs must invest a minimum of 99.5% of their assets in public debt. Units/shares in an LVNAV MMF can be purchased or redeemed at a constant price, as long as the value of the assets in the fund does not deviate by more than 0.2% from par. Public Debt CNAV and LVNAV can only be short-term MMFs. VNAV MMFs refer to funds that use mark-to-market accounting to value some of their assets. The NAV of these funds will vary with the changing value of the assets and - in the case of an accumulating fund -- by the level of income received. VNAV can be either short-term or standard MMFs."

Discussing "Asset allocation -- Currency breakdown," they write, "MMFs net assets can be broken down by base currency. Collectively, three primary base currencies accounted for 99.5% of UCITS net assets at end 2023. EUR held the predominant position with 44% of net assets, followed by USD at 37% and GBP at 19%. The proportion of EUR MMFs declined from 49% in 2013 to 37% in 2019, as the demand for USD- and GBP MMFs increased over the same period, influenced by generally higher interest rates in those currencies. In 2023, the market share GBP declined from 24% to 19% and the share of EUR MMFs increased from 40% to 44%.... In 2023, investors showed a clear preference for short-term USD and EUR MMFs, whereas GBP MMFs recorded net outflows. These outflows are most likely related to UK pension funds rebalancing their portfolios after having rushed into GBP MMFs during the gilt market turmoil of October 2022.... Standard MMFs mainly recorded flat net sales over the year, with the exception of standard EUR MMFs, which attracted EUR 48 billion in net new money. These standard EUR VNAV MMFs are mainly used in France, where they play an important role in the cash management of many French corporations."

On "Asset allocation," EFAMA tells us, "An overview of the 2023 holdings of MMFs by geographical region shows that 35% of the short-term paper held by UCITS MMFs was issued in Europe. The US accounted for 30% and Asia-Pacific for 9%. Another 26% was issued in other countries, predominantly Canada and Australia.... After the US at 30%, short-term securities issued in France and Canada accounted for 24% and 23% of MMF assets, respectively, at end 2023. Australia (7%) and the UK (6%) completed the top five. A comparison of the asset breakdown by base currency and issuing country reveals that MMFs with a USD or GBP base currency allocated a significant portion of their assets to securities issued in a non-base currency country. Frequently, countries such as Canada or Australia (and companies based there) issue short-term debt in a major currency to attract more international investors. MMFs may also invest in debt denominated in a non-base currency and subsequently hedge the currency exposure. The MMFR does require, however, that all non-base currency exposures are fully hedged."

Finally, they comment, "European MMFs have seen considerable shifts in the maturity composition of their asset holdings over the past decade. Since the bulk of the fixed-income holdings of MMFs usually have a maturity of less than one year, the maturity breakdown can change entirely from one year to the next. The vast majority of fixed-income holdings had an average maturity of between three and 12 months. At end 2023, a little over 43% of the fixed-income assets of MMFs had a maturity between six and 12 months, while 41% had a maturity of between three and six months. Over the past decade, there has tended to be a general decline in the proportion of bonds with a maturity exceeding one year. On the other hand, the percentage of fixed-income holdings with a maturity shorter than three months, although generally quite small, has increased over the two most recent years."

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