Today, we continue with excerpts from our recent European Money Fund Symposium. As we mentioned in yesterday's News, this year's event took place in Paris, France, so we took this opportunity to learn more about the French money market mutual fund marketplace. France is the fourth largest market in the world, and the second largest market in Europe (behind Ireland), with $399.9 billion, or 7.5% of worldwide assets, according to the ICI. Last week's event included the segment "French Money Funds Issues & Outlook," which featured Manuel Arrive of Fitch Ratings; Vanessa Robert of Moody's Investors Service; and, Mikael Pacot of Axa I.M. and also Chairman of the Money Market Fund Working Group at the French industry association, AFG. Each gave a brief update on the status of the variable NAV-dominated, and longer-term French money market fund industry.
Arrive commented, "Let's start with AUM [and] a few statistics, easy to remember. French money market funds represent roughly a third of the total universe of European-domiciled MMFs, two-thirds of the VNAV market, and three-quarters of the Standard MMF market. They account for about 60% of Euro-denominated, European money market funds.... So that gives a market structure in France that is very different from the other two largest markets. France is and has always been a VNAV market, whereas Luxembourg and Ireland are more CNAV, shorter-term markets."
He explained, "There are other differentiating factors of French money market funds. First, they are all variable net asset value (VNAV) funds, that means the underlying assets are mark to market where possible. That also means that they won't be impacted as much by the European reforms as other jurisdictions. There are no CNAV funds to be converted in France.... Also, the French asset managers have experience valuing short term assets that some CNAV asset managers do not have. Secondly, the French funds offer same day settlement. Thirdly, they use a wide array of instruments and strategies. For example, derivatives. They use ... asset swaps and interest rate swaps to manage duration of their funds [and may] hedge exposure to a currency.... Lastly, the French funds are primarily sold to domestic retail clients, which is very different from Luxemburg and Irish funds which are primarily sold to institutional investors."
The Fitch Senior Director told us, "What has pushed investors from short term to standard has been the search for yield since 2015 in Europe.... [T]he shift has been more pronounced [in French funds]. This also earlier, in 2012 and not 2015.... It doesn't come as a surprise that of the top ten European managers, there are four French managers, with Amundi consolidating its leadership.... [I]t is clear French standard MMFs have [now] entered negative [yield] territory. Their returns are negative since June 2016.... Standard funds have outperformed short term, which themselves have outperformed our universe of triple-A rated MMFs."
He also briefly mentioned short-term bond funds, saying, "They are attractive and appealing ... because they offer a ... low duration ... and are attractive to investors concerned about rising interest rates.... France has a market share that is 40%, 40% of short term bond funds domiciled in Europe are actually domiciled in France. [They have] now overtaken short term MMFs in assets."
Arrive concluded and summarized, "French VNAV money market funds have a significant market share in Europe.... There has been a shift from short term to standard MMFs.... Standard money market funds have outperformed short term due to higher credit and market risk. We would expect higher liquidity in short term and standard MMFs post reform, which will put more pressure on yields that entered negative territory in January 2012. These funds have also been increasingly competing with short term bond funds."
In the second segment, Moody's Vanessa Robert commented, "Money market funds continue to survive despite negative yields and regulation.... I will speak about the structure and risk profile of money market funds, and the upcoming impact on French money market funds.... [T]he French asset management industry has been growing at a slow but steady pace. It currently stands at E1.3 trillion. French money funds [are] the largest asset class in France. It has been like that for years. The money funds have been growing in France at 1.5% growth during the first 6 months of the year and they currently stand at 350 billion Euros. They are growing but at a rate lower than the industry. They are holding ground here. Their market share is 27% in Europe. While Irish funds have a market share of 37%."
She said, "There are major differences between French and Irish and Luxembourg funds on the other hand.... [T]he level of non-Euro investors in French funds is 1%, which is a major difference with Irish funds, where 50% are not in the Euro area.... Another key difference is that French funds are almost exclusively limited in Euros, while Irish and Luxembourg funds are mostly dominated in US dollars, sterling and to a lesser extent, euros. The last key difference is on the asset front. French funds are extremely exposed to French banks. Only 20% of their assets are exposed to non-European investors.... The bottom line: French funds are extremely domestically-oriented not only on the asset but on the liability, or the investor, side."
Robert explained, "In France, it's is all about VNAV. In the VNAV sector, most of the assets are invested in standard money market funds. We can see the growing share of money market funds that currently stands at 84% of the French sector. That means that French short-term money market funds continue to exist, but they only represent 16% of the industry compared to 60% back in 2011. The explanation is very simple -- it's all about yield. We can see that even standard money market funds are now in negative territory. But the yield differential has pushed investors towards standard money market funds. And investors have been keen to do so because in France, both type of funds, both the short term and standard money market funds, are eligible to be 'cash'. It's not a big deal for them to elect investment in standard money market funds."
She also commented, "A few words on the risk profile. The shift of allocation towards standard money market funds comes with additional risk, especially in terms of maturity. Standard money market funds can invest in securities with maturities between 1-2 years and they are doing so.... French money funds tried as much as they could to avoid negative yield, but at some point they could not avoid this.... Another striking feature is that 10% of the assets of the assets held by French funds are in invested in other funds. And this is really a French specificity that helped them generate liquidity.... [Regarding] liquidity, CNAV funds tend to be more liquid both on the weekly and overnight liquidity basis."
Robert added, "French funds are losing ground compared to their Irish counterparts. But they continue to draw [interest] despite negative yields. The French market remains significant. If we look at regulation, this will not change the risk of the profile of French funds, as opposed to CNAV funds that will cease to exist and will have to go through a complete product transformation. Now they key question is whether France, which is the oldest money market fund in Europe, will seize the opportunity of this new regulation and capitalize on its VNAV expertise and leading sector of VNAV funds in Europe to attract and grow its market share.... For French funds, it is all about yield, liquidity, and safety. This is the exact opposite of the order of the Anglo-Saxon community."
Finally, Axa's Pacot told us, "We manage VNAV money market funds, mainly euro.... A lot has been said already by Manual and Vanessa about the French money market fund landscape. I will focus more on the challenges that money market firms have to face, mainly the negative yield environment.... Total European MMF market accounts for E1,158 billion of which E360 billion of assets are domiciled in France (99.7% denominated in Euros). E514 billion of the total European MMF market are denominated in Euros.... Because they represent the bulk of the Euro denominated MMFs AUM, French MMF are the most exposed to the current Euro short term rates environment."
