As the US money market fund industry braces for Floating or Variable NAV funds, it can look to fourth largest money market fund country in the world, France, for some insights into VNAV funds. France, with $329 billion in MMF assets, is almost entirely made up of VNAV funds, so it has a track record that the US, and the rest of Europe, can learn from. At Crane's European Money Fund Symposium earlier this month in Dublin, a panel of French money fund experts discussed this market in a session called, "French Money Market Funds and VNAV." The segment featured Charlotte Quiniou of Fitch Ratings; Vanessa Robert of Moody's Investors Service; Thierry Darmon of Amundi; and, Yann Marhic of Credit Agricole-CIB. In her presentation, Robert summed up how the attitude toward French money funds is changing. Ten years ago she was at a meeting with an American who told her if it's not a CNAV fund, it's not a money fund. "Here we are 10 years later, with the US about to adopt, if not the French model, at least part of it, and I must say that for me, it is a small taste of revenge."
Quiniou provided an overview, saying France the second largest money fund market in Europe behind Ireland and ahead of Luxembourg. The three countries combined make up 94% of the total MMFs assets in Europe. The French market is made up almost entirely of VNAV funds, unlike Ireland, which is almost entirely CNAV, and Luxembourg, which is a mix of CNAV and VNAV. France has two classes of VNAV funds -- Short-term MMFs and Standard MMFs. In June 2014, about 65% was in Standard MMFs, 30% was in Short-term MMFs, and around 5% was unclassified. But in the past year there has been a shift. Short-Term assets are at 25%, while Standard assets are closer to 70%, said Quiniou. This is most likely driven by the low yield environment in Europe as investors are seeking the higher yields from the longer dated instruments of Standard funds.
The French Short-Term funds have some of the same attributes as European CNAV funds, she said. Short-Term funds have a median WAM of 46 days, a maximum of 60 days, a median WAL of about 90 days, and a maximum WAL of around 120 days. The Standard funds have a median WAM of 70 days, a maximum of 170 days, a median WAL of about 250 days, and a maximum WAL of over 300 days. "There's a wide range of different profiles," she said. About 50% of Short Term funds are made up of high quality, A or higher assets, while 50% are made up of BBB or lower.` About 72% of Standard funds have assets that are BBB or lower <b:>`_. Further, the four largest players in the French money fund market -- JP Morgan, Amundi, BlackRock, and Goldman Sachs AM -- manage 40% of the overall assets.
Moody's Vanessa Robert discussed the key differences between CNAV and VNAV funds. The key similarities between French Short-Term MMFs and European CNAV funds is both have to comply with ESMA guidelines and both provide same day settlement to their investors. Further, they are similar in terms of the key ratings factors as the same ratings methodology applies to CNAV and VNAV funds. "They have the same investment objectives -- to provide daily liquidity and preserve capital," said Robert. However, French MMFs tend to have a lower credit quality and higher concentration of assets than CNAV funds. There is also no evidence that VNAV funds are less prone to run risk, she said. "In times of crisis, VNAV investors are as likely to race for cash as CNAV investors." Further, Short-Term VNAV funds have very limited volatility, even in times of stress, said Robert. The daily NAVs are very much in line with what you would see with a CNAV fund.
Among the key differences between the French VNAV and European CNAV markets is there is the potential for more credit, market, and liquidity risk in France. Also, French MMFs are not rated. "Why? Because investors do not require funds to be rated. French clients do not have in their guidelines to invest in triple A rated investment vehicles." Further, valuations are different as France doesn't have CNAV funds, and instruments are different. French funds hold securities you don't typically see in CNAV funds, including interest rate swaps, currency swaps, futures, fixed rate bonds, putable bonds, and derivatives.
Assets in the Short-Term MMF market have declined by about 70% over the last 3.5 years, while assets of Standard MMFs have been growing. "This is clearly a search for yield," she said. While the French Short-Term MMF market has dropped, the European CNAV market has increased slightly over that same period. Why? One key reason is that almost all French funds are denominated in euros while the CNAV market is more diverse with US dollar, sterling, as well as euro denominated funds.
Amundi's Darmon commented on the heterogenous nature of the French money fund industry. He said, "It is a scaled down model of the fixed income management industry ... meaning, money market funds in France are not a single category or style of management. You will find a continuum of strategies along the risk curve in the money market fund industry. Whether it's today with negative yields or positive yields, you always have a continuum of offerings -- from the very low end of the risk scale to the frontier border between money market fund management and bond management."
There is also a variety of investment horizons, from 1 day, to 1 week, to 1 year and even more -- "using all the means and instruments that are provided by the fixed income universe, on the very short end of it of course. But using this capability in order to achieve the risk return objectives as described," added Darmon, whose company, Amundi, is the second largest MMF manager in France with E157 billion in assets through the end of August.
Finally, there was discussion of the impact of European money market reforms on French funds. While the big concern throughout much of Europe, moving to VNAV or Low Volatility VNAV, is of no concern in France, there could be other impacts, said Robert. "One key change to expect for investors is the liquidity requirements will definitely affect French funds. If enacted, based on the European Parliament's proposals, they will have to increase their liquidity buckets." Second, some of the requirements in the proposal -- independent research processes, know your clients etc. -- will require more resources for the smaller players and that could lead to consolidation, she told the Dublin audience.
On the subject of European MMF reforms, Rudolf Siebel, Managing Director of Germany's fund association, BVI, and Chairman of the European Fund Asset Management Association's Money Market Funds Working Group, laid out EFAMA's position on reforms. On the Low Volatility NAV (LVNAV) proposed option, he said, "EFAMA members accept a 20 basis point threshold for the permissible deviation between constant and shadow NAV on condition that the sunset clause is deleted. We should ensure that the threshold is not reduced below 20 bps."
On the Retail CNAV MMF proposal, Siebel commented, "[The] definition should be extended to natural persons (meaning individual investors) in line with the MiFID definition." On the Public Debt CNAV proposal, he added, "European companies should have options to meet their global cash flow needs in different currencies, including USD." Also, he said, "Assuming high-quality government securities will be included in the weekly liquidity calculations, fees and gates will never be implemented. Having such a requirement in place would only be an operational and legal burden for investors and fund managers."
Finally Siebel told us, "EFAMA stands behind its long established position regarding liquidity requirements for MMFs: 10% daily for short-term and standard MMFs and 20% and 15% for weekly levels for short-term and standard respectively." It also supports a 24-month transition period for any new European regulations, up from the proposed 9 months.
