Fitch Ratings has released a new report that examines trends in a number of emerging money market fund markets, including Korea, Mexico, Brazil, and India, among others. The report, "Paths Diverge for "Second Tier" Money Fund Domiciles," shows that money market funds play a major role in some of these smaller markets. We also report on a session from last week's European Money Fund Symposium called, "MMFs in Asia and Emerging Markets," that takes a closer look at some of these markets, as well as the hottest money market fund market in the world, China. (See also our previous story on our Dublin conference, "European Money Fund Symposium: Kooy, Lardner Push Viable Solutions," and see our August 10 News, "China Surpasses France as 3rd Largest Money Fund Market: ICI World.")
The Fitch report says, "Money market fund assets are concentrated in the US and Europe with 60% and 25%, respectively, of the global total of USD4.5trn invested in European or US funds as of end-2014. However, the US and Europe do not have a monopoly on money funds. Money funds are represented in many different countries. Fitch understands that money funds may operate in more countries than those represented in the ICI data, such as Nigeria, among others. The top-three global money fund domiciles -- the US, Europe and China -- comprise around 93% of total money fund assets under management. These money fund domiciles are experiencing profound change -- for different reasons."
It continues, "But Fitch believes that some of these changes -- notably regulatory ones -- will eventually influence smaller money fund jurisdictions. Specifically, money fund reform is underway in the US and Europe. New regulations have been approved in the US. In Europe, regulatory reforms and a negative interest rate environment in euros have pushed money funds into uncharted territory. In China, the substantial growth of e-commerce related money funds has driven assets under management in Chinese money funds -- and the Chinese asset management industry more broadly -- to record highs."
Fitch explains, "The enormous scale of the developments in -- and the sheer size of -- the largest global money funds jurisdictions overshadow that of their smaller counterparts. Nonetheless, important developments are underway in these jurisdictions. This report focuses on the "second tier" of money fund domiciles: Korea, Mexico, Brazil, India, Taiwan, Canada and South Africa that are in the top-10 list after the US, Europe and China as of end 2014, per ICI data. Money fund assets under management in other jurisdictions are extremely low, and accordingly, Fitch has excluded them from this analysis."
The report says global money fund AUM has shrunk 14% in the last five years with the US down 18% and Europe money funds down 3%, according to ICI data. However, explains Fitch, "Defying the developed market downtrend are the emerging markets, where money fund assets have shown strong growth momentum. Brazil is the fastest-growing market with money fund AUM having almost tripled to BRL129.4bn, from BRL47.6bn, in the last five years. The Indian market has rapidly expanded as well, with total assets reaching INR1.8trn as of end-December 2014, from INR0.8trn five years ago. These two markets have seen their shares double in the global market to 0.6% and 1.0%, respectively. Strong growth in Brazil was mainly driven by high yields, themselves a result of high interest rates, which dwarf the performance of other asset classes."
The report tells us, "Korea has been surpassed by China and become the fourth-largest money fund market after the US, Europe and China, representing 1.7% of the global market; that is despite the AUM in Korean money funds having increased 16% to KRW84trn in 2014, from KRW72trn in 2009. An important challenge for money fund managers in these markets is the supply of eligible assets. Bank regulation is forcing banks to fund longer, thus broadly limiting the availability of short-term paper typically held by money funds."
It adds, "The AUM of Mexican and South African money funds has barely changed since 2009. Canada and Taiwan have seen their money fund markets shrink, while Canada experienced a severe decline of over 50% to CAD25bn at end-2014 to account for 0.5% of the global market, compared with 1% five years before. In these cases, money fund managers have needed to manage to outflows, which, all else being equal, typically equates to running more liquid portfolios."
Fitch adds, "Brazil and India top the market with nominal yield of over 10% and 8%, respectively, although the high yields are linked to the high inflation in these two markets. Nonetheless, real yields after inflation still dwarf other markets. Taiwanese money funds had, in fact, generated a real yield above 1% as of May 2015, despite a nominal return of only around 0.5%, given the island's deflation environment with a yoy CPI of -0.7%5 as of May 2015. Canadian money funds generate low real yields, slightly above zero, more in line with the typical yield of US money funds."
Further, they write, "The AUM share of money funds relative to total mutual fund assets has decreased across most jurisdictions over time. Korea is the only country among Fitch's sample of "second tier" markets to have seen its money fund share expand since 2011.... The proportional exposure to money funds varies in different countries. Money funds dominate and represent over 40% of total mutual fund AUM in Mexico and Taiwan, as the equity fund market in Mexico and the bond market in Taiwan are comparatively less developed.... Money funds represent less than 5% of the mutual funds market in Brazil (end-2014 AUM: USD45m); the ratio increases to about 20% after adding DI-linked funds. Brazilian money funds and DI funds have similar objectives, portfolio composition and investment policies."
Finally, Fitch tells us, "Money funds are less utilized in the "second tier" domiciles in terms of broad money. In India, Canada, Taiwan and Korea, these funds represent less than 5% of their respective country money supply (M2), which is far behind the over 20% in the US. Except for Korea and Brazil, growth in money fund AUM in all other domiciles covered in this report is slower than growth in the supply of broad money. This may be a reflection of the level of banking disintermediation and short-term capital markets development in these respective markets. That the penetration rate of money funds is lower in all jurisdictions other than the US suggests potential for growth."
Also, at our European MF Symposium last Friday, Crane Data's Peter Crane and Standard & Poor's Andrew Paranthoiene presented on "MMFs in Asia and Emerging Markets." Paranthoiene said most assets of emerging market MMFs have remained flat since 2008, apart from China, which has seen explosive growth to E324 billion through Q1 2015. China became the third largest MMF market, jumping ahead of France and Luxembourg and trailing only the US and Ireland. Since December 2010, China's MMF assets have spiked an incredible 1,769%.
Currently, MMFs account for 41.3% of China's mutual fund industry AUM, said Paranthoiene. There are 180 public MMFs in China with 72 launched this year alone. Further, 69 of the 72 launches are MMF-styled, internet based products, like the largest money fund in China, Yu'e Bao, which is owned by e-commerce giant Alibaba and run through its Alipay, an online payment service. Alipay users are allowed to put their money in the Yu'e Bao money fund.
Yu'e Bao launched in June 2013 and has over 80 million investors and over E100B in assets under management. Its rate of return has dropped from 7% in 2013 to 4.3% at the end of Q1 2015, due to a decrease in interest rates. Paranthoiene explained that Tencent, another e-commerce company, has a money fund called Licaitong, which has 272 million customers/potential investors.
"The flow of funds is phenomenal," said Paranthoine, but it's a transaction method that totally new and unlike anything in the US or European markets. "Smartphone apps provides instant withdrawals and potentially threatens traditional asset management along with funding sources for banks," Paranthoiene said. Chinese regulators have taken notice and are considering new rules for money funds, such as lowering the WAMs from 180 days, daily and weekly liquidity, among other measures.
