A week and a half ago, Crane Data hosted its European Money Fund Symposium Online, which featured presentations on European and "offshore" money market mutual funds. (See our Nov. 20 News, "Money Fund University Going Virtual; EMFS Online: Irish Funds' Rooney," our Nov. 23 News, "European MFS Online: IMMFA's Iommi Says MMFs Resilient During Crisis," and our Nov. 27 News, "More European MFS Highlights: Fitch's Sewell Talks Asian Money Funds.") Today, we revisit the "French & Continental Money Fund Update" session, and this time quote from Vanessa Robert of Moody's Investor Service, who discusses "French Money Market Funds." (The European MFS Online replay is here in case you missed it.)
Robert begins, "You can see that the market has declined, but I must say that ... there has been a sharp rebound in Q3 by more than 10%. Now the total size of the French money market fund sector is at E375 billion. However, there are two areas where there has been no rebound: the number of money market fund sponsors, as well as the number of money market funds. There has been a decline for a few years now, reinforced by the EU money market fund regulation that has made the cost of managing money market funds higher with ... stress testing, regulatory disclosures, client procedures [etc.]. So, the cost of doing business is higher.... At the same time, the regulation was also a good occasion for sponsors to revamp their fund offerings and to close some of their funds.... Hence the decline in the number of money market funds."
Robert's slides showcase the decrease in the size of the French money market fund sector, charting it's gradual decrease from E348 billion in 2018, to E321 billion in 2020. Money market fund providers decreased from 54 to 35 over the same two-year span, as did the number of money market funds, which dropped from 200 to 114. Robert also charts the increased average fund size, which jumped from E1.7 billion euros in 2018 to E2.8 billion euros in 2020.
Robert explains, "Let's look at the types of money market funds we have in Europe. With the new EU regulation, we can have funds that are not only VNAV but also public debt CNAV and LVNAVs.... Before the regulation, this was not the case. However, and this is in contrast with what we have observed in Ireland, the French money market fund sector remains 100% VNAV oriented." According to another slide, "The French MMF market at a glance," 17% of French assets are "Short-Term" money funds, while 83% are "Standard" money market funds.
Turning to the turmoil of March, Robert explains, "Now let's look at the impact of the crisis.... Similar to what occurred in Ireland, we can see that in France the waves of redemptions occurred during the month of March, specifically during the week of March the 16th. The outflows were highest on March the 17th with outscores close to 9 billion euros on these specific dates."
She continues, "Similar to what Patrick [Rooney of Irish Funds] said, in France there is cyclicality as well. We know that in terms of subscription-redemption patterns during the first two months of the quarter, there are usually subscriptions. While during the last months of the quarter and specifically in June and December, there are outflows because investors need that cash to settle expenses, to stretch out their balance sheets."
Robert adds, "Now let's look at what happened in 2020. You can see that the outflows observed in March reached a record level close to 15%, more or less this is the same level of outflows we observed back in 2008. But this year it was observed within a shorter period of time.... The outflows predominantly affected the Standard money market funds [while], more or less, short term VNAV remained flat."
Finally, on net flows, she comments, "We looked ... at the cumulative net flows of French money market funds in between February and May, and observed that over a quarter of French money market funds experienced net outflows of 5%, and more than 10% ... lost 25% of their assets during this period of time. So, it's quite significant and massive. However, as you can see, no French money market fund was forced to suspend redemptions."
In related news, a release entitled, "Moody's: Global money market funds outlook remains negative in 2021 due to economic uncertainty, likelihood of more regulation," tells us that, "Money market funds came under severe stress during Q1 2020 in the US and EU, and that, "Looming regulations and rising economic uncertainty support negative outlook."
Moody's release continues, "The 2021 global market money funds sector outlook remains negative, amid economic uncertainty and the increased likelihood of additional regulation following industry support from government and sponsors during the early stages of the coronavirus pandemic, Moody's Investors Service says in its annual outlook. Additionally, the operating environment for global money market funds became more difficult as banking systems outlooks turned decidedly negative, hurting the credit quality of money market instruments. However, in the second half of 2020, prime money market funds credit quality strengthened as managers increased liquidity and allocations to higher quality obligors."
Vice President Stephen Tu comments, "Prime money market funds liquidity is high but industry risk remains due to market uncertainty and lack of yield pickup relative to government funds.... Money market fund sponsors will continue to waive fees as the interest rate environment remains persistently low, and the instability of prime money market funds performance in the early days of the COVID-19 crisis increases the potential that more reforms will be imposed on money market funds in the US and Europe."
The release adds, "In Europe, the credit quality of the limited volatility net asset value funds has improved, reflecting conservative portfolio management, along with an increase in government and agency security holdings to sustain unexpected outflows resulting from coronavirus related uncertainty."
