J.P. Morgan Asset Management announced the launch of a new "Flexible Distributing" class for its Luxembourg-domiciled Euro-denominated money market funds, which would allow the funds to maintain a stable NAV in a potential negative yield environment by automatically selling shares to cover expenses and debits from any yields below zero. (The Euro money fund's "Distributing" classes will be closed.) Below, we excerpt from the company's announcement (which was reported in the Financial Times), and we discuss the issue with Managing Director Robert Deutsch. The world's second largest manager of money funds (and largest outside the U.S.) issued a "Notification of share class changes for JPMorgan Euro Government Liquidity and Euro Liquidity Funds" Wednesday. (Note that these funds are not available or intended for U.S. investors and are only open to qualified non-U.S. institutions.)

JPMAM says, "The Board of Directors of JPMorgan Liquidity Funds would like to inform you of the Board's decision to make changes to the Sub-Funds and to the Fund's prospectus. Following the recent decision by the European Central Bank to cut interest rates and the subsequent decrease in European bond yields, it is becoming more difficult to maintain a positive net investment income and to stabilize the net asset value of the (dist.) share classes at the initial subscription price per share, as described in the Prospectus. The Board has therefore decided, due to the changing economic situation relating to the Sub-Funds to close the existing (dist.) share classes and to update the investment objectives and policies of the Sub-Funds to reflect the changing market conditions. Alternative share classes will be offered to electing shareholders, as further detailed below."

The Notification explains, "The Board has launched a new type of distributing share class for the Sub-Funds -- the "(flex dist.) share class". In a positive yield environment, this share class would have similar characteristics to the existing (dist.) share class. However, in a negative yield environment, a specific mechanism would apply in order to stabilise and maintain the net asset value per share at the initial subscription price per distributing share. In this mechanism, an amount representing any shortfall due to the portfolio's low or negative yield as well as the annual total expenses would be calculated daily and deducted from your holding by redeeming an appropriate number of your shares in the relevant class, with the aim that the net asset value of the share class can remain stabilised at the initial subscription price per share. Although the aim is for the net asset value to remain stable even in a negative yield environment, in such circumstances the number of Shares held, and hence the value of your holding, will decrease and you will receive reduced distributions in future. At the time you redeem, you may get back less than you originally invested. These share classes are only available for shareholders who have expressly given their consent to the redemption of shares as described above."

J.P. Morgan's Deutsch tells Crane Data, "We created this new, more flexible share class to provide clients more options regardless of the yield environment. The Flexible Distribution Class was prompted by client feedback seeking a way to automatically preserve the operational simplicity of a stable NAV regardless of the interest rate environment -- positive or negative. As you know, the ECB pushed the reserve rate to zero. And while there is a low probability of a further rate cut at the next meeting, there is a possibility that the rate could go negative over the next six to 12 months. We have taken the lead by offering clients an alternative that operates like business as usual with same-day settlement for purchases and redemptions."

He explains, "While other managers are liquidating funds, eliminating or restricting available investments, we wanted to give clients choice and allow them to retain the benefit of diversification vs. a bank product in a negative rate environment. It's quite an innovative solution that positions clients well short and long term. If the ECB turns monetary policy upside down and takes it negative, the Flexible Distribution Class will automatically set to cover only the yield shortfall and a portion of expenses and charges. When the environment turns positive again, the deduction will cease. Clients will receive a daily yield report showing both positive and should there be, negative, distribution rates."

"In our consultations with Euro clients, they are very appreciative of the flexibility, predictable accounting and investment diversification this new solution provides. J.P. Morgan is actively working on developing a conceptually similar solution for U.S. clients, but it is a bit more complicated given 2a-7 rules," Deutsch adds.

Note: To see a copy of the Euro and "offshore" money market funds covered by Crane Data's Money Fund Intelligence International with recent yields and asset totals, e-mail Natalia and include "MFII" in the Subject line.

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