In an odd coincidence, both Fitch Ratings and Moody's Investors Service published 12-page reports entitled, "2014 Outlook: Money Market Funds." Both have stable ratings outlooks on the sector and focus on pending regulatory changes and further consolidation, but Moody's also discusses low yields and profitability while Fitch comments on corporate cash and shrinking supply. Fitch writes in its press release, "Fitch Ratings says its rating outlook for money market funds (MMFs) globally is stable for 2014, underpinned by funds' conservative, active management of credit, market, and liquidity risks. The outlook also reflects the status quo with respect to MMF regulations globally, as Fitch believes that any regulatory reform will take time to implement."
They continue, "Regulations proposed for MMFs, if enacted, would have far-reaching implications, affecting funds' terms and investment strategies, both in the US and Europe. Most managers have been proactively reviewing their offerings and exploring alternative liquidity products, as the appetite for convenient and diversified investment solutions will persist. Nevertheless, regulatory changes could pressure certain funds in terms of unexpected redemption activity."
Fitch tells us, "The next US debt ceiling deadline may arise between March and June 2014, and could again create liquidity pressure on MMFs denominated in US dollars. MMFs will likely implement strategies similar to those they applied ahead of the October 2013 debt ceiling deadline prior to its resolution, primarily by building up liquidity buffers. It turned out that investor redemptions were relatively muted in September and October, resulting in limited liquidity pressures on the funds."
They explain, "Regulatory and political changes are also causing the supply of eligible investments for MMFs to decrease. For example, evolving assumptions on sovereign support for banks may further reduce the number of Tier 1 rated banks. In response, managers are venturing into newer markets and approving new issuers. Managers are also increasingly investing in innovative money market products, such as callable commercial paper (CP), collateralised CP and repo backed by non-government collateral."
Finally, Fitch writes, "The low interest rate environment is expected to persist in 2014, and will continue to present MMF managers with operational and profitability challenges. Given the importance of scale in this market, we expect additional industry consolidation, particularly in Europe. While MMF assets under management predominantly reside in the US and Europe, MMF products continue to grow in other markets. Portfolio guidelines for MMFs in these markets are converging with current US and European standards. Nevertheless, emerging market short-term markets can exhibit greater volatility, as observed, for example, in China."
Moody's says in their piece, "Our outlook for money market fund (MMF) ratings is stable. We do not expect significant shifts in MMFs' credit or stability profiles over the next year. Fund managers remain cautious in the face of persistent supply constraints, potential shifts in monetary policy, political gridlock in the US and Europe, and looming regulatory reform."
They continue, "The biggest story in 2014 will likely be the finalization -- or near finalization -- of new MMF regulations in both the US and Europe. Regulatory reforms that were proposed in 2013 will likely result in dramatic changes to the MMF product, to investor preferences, and transform the industry as a whole. Overall, regulatory changes will serve to protect MMF investors by addressing structural vulnerabilities and attempting to reduce systemic risk associated with MMFs."
Moody's adds, "The low interest rate environment will continue to pressure fund yields and MMF managers' profitability. Persistent low rates will drive more investors out of MMFs in both Europe and the US, and will push fund managers to maintain "barbelled" portfolio strategies. MMFs that implement such "barbelling" strategies -- focusing simultaneously on both the low and high ends of a credit and/or maturity range -- will have greater pressure on their credit and stability profiles."
Finally, they write in their summary, "Profitability pressures will drive further industry consolidation. Fee waivers, a function of low gross yields, will continue to be a drag on asset managers' revenues and earnings. New compliance and operational requirements in regulatory reform proposals will add further expense to MMF managers' cost structures, strengthening the advantages of large players with more scale and broader client relationships. The trend towards greater industry concentration will continue in 2014 as more small- to medium-size players exit the market or sell out to larger MMF aggregators."
