Yesterday, Moody's released a statement entitled, "Sterling and Euro money fund assets to increase post-Brexit; US prime funds see surge in outflows ahead of regulatory reform," which reviews some issues involving Dublin and Luxembourg-based "offshore" money market funds. The article states, "Sterling and euro prime money market fund (MMF) assets will increase in the coming months amid post-Brexit uncertainty despite record low yields, says Moody's Investors Service. In parallel, US prime funds are experiencing a spike in outflows ahead of October's regulatory changes." We review Moody's update, and also quote from a recent Fitch Ratings "European MMF Quarterly" below. (Note: See Crane Data's Money Fund Intelligence International for more information on offshore and European money funds, and check out our upcoming European Money Fund Symposium, which will be Sept. 20-21 in London, to learn more about this sector.)
Vanessa Robert, Senior Credit Officer at Moody's, explains, "Uncertainties around Brexit and the lack of comparable investment alternatives have kept investors in money market funds. Lower investor confidence and higher risk aversion could cause corporate investments to be postponed, leading to inflows into low-risk, highly liquid assets such as MMFs."
The release goes on, "Despite the drop in MMF yields, Moody's says euro prime MMFs reached their largest size in a year, at EUR 62.9 billion at the end of June 2016, as investors have very few safe alternative investment options. Euro prime MMFs received EUR 7.3 billion of inflows in Q2, equal to a 13.1% increase. Sterling money funds withstood the perfect storm, as their assets under management (AUM) increased by 4.7% in Q2 to GBP107 billion. Meanwhile, the 10 largest Moody's-rated US prime MMFs lost USD 45 billion in June, the largest monthly outflow of the year."
Moody's Jordan Schoenberg comments, "The upcoming US regulatory reforms, which include a switch to floating net asset values and the introduction of liquidity fees and redemption gates, have led to a spike in outflows from US institutional prime funds -- a trend we expect to continue between now and the 14 October deadline."
The article adds, "Moody's expects that due to uncertainty surrounding the regulatory reform, US fund managers will continue to conservatively manage portfolios, with prudent duration and liquidity management taking precedence over yield. US Prime MMF liquidity balances hit new highs in June with the ten largest Moody's-rated US Prime MMFs maintaining close to 50% overnight liquidity in anticipation of a wave of investor redemptions in October."
Lastly, Moody's states, "Euro MMFs' liquidity was also at a 12-month high (35.5% of assets) in Q2.... Moody's expects euro prime MMFs' stability profiles to deteriorate slightly: there will be less overnight liquidity and WAMs will be higher, driven by more investments in long-term securities, since the ECB is not expected to raise its interest rates anytime soon. Sterling portfolio managers will continue to adopt a prudent investment strategy. Moody's anticipates high cash balances and high exposures to government securities, a positive for both credit and stability profiles."
Fitch Ratings also writes in its latest "European MMF Quarterly- 2Q16" about "Sustained Demand for European MMFs Amid Market Uncertainty." They say, "European CNAV assets in euros, US dollars and even sterling, increased in 2Q16 as investors sought safe havens around the date of the UK's vote to leave the European Union. They reached EUR562bn at end-June, close to their end-2015 highs."
The report states, "Flows in Fitch-rated sterling-denominated funds were muted during the week of the vote on 23 June. We have not detected any unusual outflows since; the largest weekly fund outflow was 11%, well below historical highs. We have seen more inflows and we expect this to continue in the near term as uncertainties remain. In contrast, US-dollar denominated funds saw more asset flow volatility during the weeks around the referendum, mostly driven by asset allocators seizing attractive investment entry points in risky assets, out of cash."
Elaborating on "Cautious Portfolio Positioning," they write, "MMFs were cautiously positioned ahead of the referendum in the event of material outflows and to contain the impact of market volatility. MMFs had overnight and one-week liquidity of 31% and 42% on average at end-June. This was their highest over the past 12 months and large relative to our 'AAAmmf' criteria. Average portfolio maturities have been shortened across all three currencies and fund managers reviewed their investment case and limits on those issuers most sensitive to a UK-leave vote."
Fitch adds, "The supply of high-quality short-term sterling debt could be significantly affected by adverse funding conditions for non-UK issuers (85% of sterling MMFs at end-June). We believe that UK government supply will be an important factor in mitigating any supply constraints. Brexit also poses considerable uncertainty for the presence of offshore UCITS in the UK, while the vast majority of MMFs used by UK investors are domiciled in Ireland and Luxembourg."
The article then discusses "MMF Regulation Entering Final Stage," explaining, "Fitch believes that the Council of the EU's proposed revised European MMF regulation would make MMFs safer, through portfolio diversification and liquidity rules. As proposed, low volatility NAV (LVNAV) MMFs would be a viable alternative to existing CNAV funds, although liquidity requirements could be an obstacle."
Finally, Fitch writes under "ECB Pushes Euro MMF Yields More Negative," "Euro MMFs saw their yields fall further into negative territory driven by the ECB's quantitative easing. The average euro MMF gross yield was negative 0.29% at mid-July. Sterling MMFs' yields slowly declined from mid-June, as portfolios were more cautiously positioned with higher exposure to sovereign debt."
