This month, Money Fund Intelligence speaks with Kim Hochfeld, the new Chair of IMMFA, the London-based Institutional Money Market Funds Association (www.immfa.org). Hochfeld, who is also Managing Director at Morgan Stanley Investment Management, gives us the latest on European Money Market Fund Reforms and talks about what's next for money funds in Europe. Our Q&A follows. (Note: Hochfeld and IMMFA MD Jane Lowe will keynote our European Money Fund Symposium, which starts Thursday morning in London. For those in attendance, welcome to London! Note too that this article is reprinted from the September issue of our Money Fund Intelligence newsletter. Contact us at inquiry@cranedata.com to request the full issue.)
MFI: When did you become Chair? Hochfeld: I was elected Chair for a three year term at the beginning of July by members at our Annual General Meeting. Our former Chair, Reyer Kooy, was re-elected to the Board, which is a positive for IMMFA as it allows a level of continuity. Kathleen Hughes from GSAM and Ian Lloyd from LGIM are still on the Board too, and we have been joined by Beccy Milchem from BlackRock. So it's a team with plenty of experience.
MFI: What's been IMMFA's main focus? Hochfeld: European Money Market Reform has absolutely been a key focus for us, especially over the last 18 months. It has been a long time coming. We have been focused on defining our LVNAV structure and working with clients to make sure they understand how LVNAV works, and then obviously there are challenges for our members as to how they position their Euro funds. There's still much work to do, by the vendors, the money fund managers, the transfer agents, the fund administrators, the portal providers, their trading systems, etc., in order to be ready for the coming changes.
One of the challenges is the clarity around Euro MMFs. For example, there is still an element of uncertainty as to whether share cancellation as a mechanism for handling negative yield will be permitted under new Regulations. This is the so-called RDM [reverse distribution mechanism]. It seems that most providers have built for different outcomes, although the market has different viewpoints as to which scenario will prevail.
MFI: What happens after reforms? Hochfeld: I think where IMMFA can really add value is around education and marketing, particularly if RDM does not continue … and managers have to make choices about what they will offer instead. IMMFA's expectation is that over time the membership will offer most types of short-term money funds, both VNAV and CNAV.
It will therefore be important to educate our existing and any prospective investors about the difference in running short-term VNAV Euro funds vs. how some of the existing short-term Euro VNAV funds are managed. There will be big differences in the old IMMFA-style universe of short-term money funds that are all AAA-rated, compared to some of the VNAV funds that are out there at the moment, which generally don’t have a rating and have a lot more flexibility to take more risk to generate a higher return.
Over the next year, the IMMFA will be focused on broadening our investor base globally and tackling challenges related to accounting treatment, to see if we can achieve more consistency and certainty on the accounting treatment of short-term money funds in the European Regulation, much as the S.E.C. offered for U.S. 2a-7 money funds.
MFI: Does IMMFA only deal with short-term money market funds? Hochfeld: Not any more. Historically IMMFA only represented CNAV short-term money funds. Yes, we had accumulating share classes, but they still use amortized cost accounting. However the Association always viewed the European Regulation as a game changer, because it codified the regime for money funds across the whole of the European Union. So IMMFA responded to it by changing its constitution effective 1 January 2018 to cover all types of money market fund permitted under the Regulation. It means that now we cover CNAV and VNAV short term MMFs, and also VNAV standard MMFs. To put it in context, the VNAV standard MMFs in Europe are essentially the same product as U.S. ultra-short bond funds.
Also, once the Regulation came into force, the need for the IMMFA Code of Practice diminished, as much of what is in the Code now appears in the Regulation. The Code still applies to members, but from January 2019 it will be replaced entirely by the IMMFA Principles of Best Practice. Details are available on the IMMFA website. All IMMFA members are bound by the Principles of Best Practice. In replacing the Code, IMMFA sets out what the Principles would do instead.
To quote: "The Principles have two purposes, both of which are intended to support investor confidence in the industry: To describe in plain English the key requirements that apply to money market funds and that operate to protect investors and markets; and to describe additional practices beyond the applicable regulatory requirements where these are considered necessary for the good governance of the funds."
MFI: Accumulating funds are different than VNAV, right? Hochfeld: They're very different. Today's accumulating share classes are share classes whereby the accrued interest is rolled up into the NAV every day. The capital portion, the part which would otherwise be 1.00 in a CNAV share class, does not change in an accumulating share class. That is stable, because accumulating share classes today still use amortized cost accounting to value the underlying assets. So, the change in the price is merely reflective of the accrued income. For a VNAV fund, the change in the price is reflective of both the accrued income and the mark-to-market on the underlying assets.
MFI: What are some of the main differences with U.S. reforms? Hochfeld: There are aspects of European reforms which are more complex than the U.S. 2a-7 reforms, although the new product types are arguably better aligned to existing funds. The LVNAV product is a new fund type, so the market is having to come to grips with its complexities. It is much easier to understand the public debt CNAV product, as this is ... like today's government funds.
Another difference is that we do not have trigger-based fees and gates on our VNAV funds but we do have them on our treasury fund equivalent. For VNAV, we still have the provision for fees and gates at board discretion under UCITS rules, which is what we have at the moment on our existing CNAV funds.
MFI: Can you talk about investors? Hochfeld: I speak to investors all the time, and from a relative value perspective `our euro funds still offer great value to clients that are holding cash in euros. From a risk-return perspective, the funds still represent the gold standard.
There is a wide variety of different investors types in our European funds, including corporations and financial institutions, [and] it is specific to different currencies. [For example], local authorities in the U.K. are able to use money funds, as are pension funds in the Netherlands. It's not that money funds are more attractive to one market or another, it's that they're more attractive to one investor type specific to one market or another.... A big chunk of investment also comes from financial institutions, whether they're funds or third-party, sweep money or insurers. [Recent IMMFA statistics show corporates, funds, third parties, financials, insurers, and the public sector as the largest investor segments.]
I'd say a major theme that the industry is working on through IMMFA, as well as on a fund by fund basis, is getting money funds accepted as collateral at clearing houses. Money market funds do qualify for holding client monies in Europe, but it has to be implemented on a country by country basis (because of the link into insolvency law). So at the moment we have mostly focused on the U.K. Getting a wider acceptance of the use of money funds for that cash would be a great boon in assets for the industry.
MFI: Is there fee pressure? What about MMF competitors? Hochfeld: Fee pressures come from within the industry and from competing products.... In terms of our competitors, bank deposits are clearly a big competitor, but it's not just depo. It's repo, ultra-short or short duration strategies, whether those are pooled funds or separately managed accounts. Structured deposits are also competing for short term cash, as are other funds, for example, that invest in supply-chain receivables. There are a lot of options out there.
MFI: What's your outlook overall? Hochfeld: I'm optimistic about the future. These reforms will bring substantial change to our industry and we will work with investors to ensure they understand the implications. But longer-term, we think they're a real positive for money funds. They're designed to make the product more robust and more transparent, and that in turn should incentivize cash rich investors to use money funds to manage excess liquidity rather than using a bank account or a repo.
We think that along with new markets and new technology platforms that are being developed, money funds are going to become more attractive and more prolific for cash investors. I don't think that Basel III and bank appetite for short-dated deposits are going to go away any time soon. So along with a more attractive yield environment in dollars and sterling, and hopefully euro in the not too distant future, IMMFA and its member firms firmly believe that money funds remain an attractive yield and risk diversification play for short-term cash investors.
