Moody's Investors Service published a "Special Comment" yesterday entitled, "Money Market Funds Navigate Risks From Europe's Credit Concerns," which says, "The ongoing sovereign debt crisis in Europe has had little impact to date on money market fund investors, with fund managers having moved early to de-risk portfolios by shortening maturities and reducing sovereign and bank exposures as risk within banking systems rose. With their relatively short-duration portfolios, money market funds have been able to transition their holdings away from deteriorating sovereign and banking credits. In regard to Greece, Ireland, and Portugal, the managers of all Moody’s-rated money market funds have eliminated their exposures altogether by December 2010."
The report, authored by VP & Senior Analyst Robert Callagy, says, "Looking forward, we expect fund managers to remain sensitive to the short-term transition risks associated with sovereign credits and related banks in Eurozone countries experiencing higher levels of stress. Active portfolio management has and should continue to improve credit quality for money funds by reducing single-obligor concentrations and broadening geographic diversification. However, while these steps should also enable fund managers to avoid most credit risks, some exposure to unexpected and correlated shocks will remain intrinsic to their structure, particularly as investment opportunities dwindle. Further, while we believe credit risk is being carefully managed, 'run' risk remains, and negative headlines or credit degradation of European sovereigns and/or financial institutions may prompt investors to redeem their investments first and ask questions later."
Moody's continues, "While prime money market funds' exposure to Eurozone countries remains high, active risk management on the part of fund managers has led to a reduction in overall Eurozone exposure. With respect to countries experiencing higher levels of stress, money market funds have become even more conservative, shortening maturities and reducing single-name exposures or, as in the case of Greece, Ireland, and Portugal, eliminating the exposure altogether. This has limited the impact of increased credit spread volatility on mark-to-market net asset values."
The report explains, "Given the de-risking of funds' portfolios and their greater diversification, we believe that Moody's-rated prime money market funds with European exposure are better positioned today than they were at the beginning of 2010 to withstand the credit transition of individual banks or groups of banks in the Eurozone periphery. For example, Moody's-rated prime money market funds currently have no exposure to Greek, Irish, and Portuguese financial institutions, less than 1% exposure to investments in Spanish financial institutions, and no exposure to any of these countries' sovereign debt. The ongoing sovereign debt crisis has awakened money fund managers to the potential for meaningful credit transition out of financially stressed sovereigns and banking systems, and as a result they have increased their investments in the strongest financial institutions."
Finally, Callagy writes, "While we have observed a gradual reduction in investment exposure to a number of European countries in Moody's-rated prime money market funds over the past 15 months, United Kingdom, Switzerland, Netherlands, Germany, and France remain among the exceptions. In fact, investment exposure to Germany and France over that time has ebbed and flowed but remained fairly constant, from 18% of total prime fund assets at December 2009 to a high of 20% in December 2010, and ending April 2011 at 18%. Germany and France are generally considered to be two of the Eurozone's stronger economies, and thus may be viewed by money market funds as safe havens."
Note that early indication are that money funds gradually reduced their European holdings in June, but that they continue to invest in Eurozone credits. J.P.Morgan published a brief entitled, "`Update on prime money fund holdings for June 2011" yesterday, and Crane Data is expected to release its comprehensive Money Fund Portfolio Holdings series on Friday. Money funds have also seen inflows overall and into Prime Institutional funds in particular on three of the last 5 days, according to our Money Fund Intelligence Daily, indicating that the relatively modest outflows these funds experienced in the second half of June appear to have subsided.
