A press release entitled, "EFAMA publishes 2022 industry Fact Book," tells us, "The European Fund and Asset Management Association (EFAMA) has released its 2022 industry Fact Book. The 2022 Fact Book provides an in-depth analysis of trends in the European fund industry, with an emphasis on what happened in 2021. It also includes an extensive overview of the regulatory developments across 28 European countries and a wealth of data." (Note: We recently learned of the Fact Book from EFAMA's Federico Cupelli, who will be speaking at our upcoming European Money Fund Symposium, which is Sept. 27-28 in Paris, France. Registrations are still being taken, so we hope to see you in France next month!)
EFAMA Director General Tanguy van de Werve comments, "Beyond providing in-depth analysis of recent trends in the European investment fund industry, this year’s edition of the Fact Book analyses several issues highly relevant for our industry, including the current limitations of the Sustainable Financial Disclosure Regulation (SFDR), the review of the ELTIF regulation, the opportunity cost of saving excessively in bank deposits, as well as some proposals to amend the money market funds regulation. We hope that these analyses will contribute to a better understanding of the structural and regulatory environment that affects the outlook for the industry.”
The section on "UCITS money market funds," explains, "Net assets of MMFs increased only slightly in 2021 (EUR 1.5 trillion), following two years of solid increases. MMFs also stopped attracting net inflows, as net sales turned negative (EUR 2 billion) against a background of strong economic recovery and continued low interest rates. The small net outflows of 2021 stand in stark contrast to the record inflows the previous year (EUR 215 billion), as investors responded to the economic uncertainties surrounding the pandemic by rushing into MMFs."
It continues, "Net asset growth of MMFs amounted to 4% in 2021, which was solely attributable to market appreciation, as net outflows were close to zero. Compared to long-term UCITS, MMF asset growth reflects net sales rather closely, as the valuation of the short-term instruments that MMFs mainly invest in varies little over time. Exchange rate effects can, however, have an impact on MMF asset growth."
EFAMA states, "There used to be an inverse relationship between the inflows into MMFs and short-term interest rates. This correlation has become much less pronounced in recent years, as short-term interest rates dropped below zero. In this low-to-negative interest rate world, investors seeking safety or liquidity still consider MMFs a good investment solution for dealing with uncertainty; investors’ response to the pandemic in 2020 has confirmed this.... The MMF market is dominated by three domiciles. Ireland held the largest market share of UCITS MMF net assets (43%), followed by Luxembourg (28%) and France (24%). Combined, they represent 95% of the European total."
They write, "The EU Money Market Fund Regulation (MMFR) was adopted in 2016 and came into full effect in January 2019. The Regulation introduced a specific authorisation procedure for all MMFs managed or marketed in the EU, along with prescriptive rules for eligible assets, portfolio diversification, the credit quality of fund holdings, risk management obligations, stress-testing, asset valuation and NAV calculation rules. In addition, the MMFR sought to improve transparency by specifying disclosure obligations to investors and reporting obligations to national competent authorities."
Discussing "Types of MMFs," EFAMA says, "The MMFR distinguishes between three main categories of money market funds: Public Debt Constant Asset Value (PDCNAV) MMFs; Low Volatility Net Asset Value (LVNAV) MMFs; and, Variable Net Asset Value (VNAV) MMFs. Aside from these categories, the MMFR also distinguishes between Short-term and Standard MMFs. Short-term MMFs are required to adhere to tighter investment rules than Standard MMFs. All three types of funds may be categorised as Short-term MMFs: Public Debt CNAV, LVNAV and Short-term VNAV. Standard MMFs must be variably priced, therefore making all Standard MMFs VNAV funds."
They explain, "PDCNAV and LVNAV MMFs use amortised cost accounting -- provided certain conditions are met -- to value all of their assets and maintain a net asset value (NAV), or value of a share of the fund, at €1/£1/$1. Public Debt CNAV MMFs must invest a minimum of 99.5% of their assets in public debt. Units/shares in an LVNAV MMF can be purchased or redeemed at a constant price, as long as the value of the assets in the fund does not deviate by more than 0.2% from par. VNAV MMFs refer to funds that use mark-to-market accounting to value some of their assets. The NAV of these funds will vary with the changing value of the assets and -- in the case of an accumulating fund -- by the amount of income received. PDCNAV and LVNAV grew in both 2020 and 2021. Net assets of regular VNAV increased strongly in 2020, but decreased in 2021 as outflows that year were mainly concentrated in that segment of the MMF market."
The Fact Book continues, "MMFs can also be broken down by base currency <b:>`_. Three main base currencies accounted for 99.5% of UCITS net assets at the end of 2021. EUR was in first place with 43% of net assets, followed by USD (33%) and GBP (24%). The share of EUR-dominated MMFs has been falling, from 52% in 2011 to 38% in 2019. Consequently, the market shares of USD- and GBP-denominated MMFs rose over the same period, edged up by generally higher interest rates in those currencies. This trend reversed in 2020, when the market share of EUR-dominated MMFs shot up again, and the share of USD MMFs dropped."
It adds, "An overview of the 2021 holdings of MMFs by geographical region shows that 46% of the short-term paper held by UCITS MMFs was issued in Europe. The United States accounted for 27% and Asia-Pacific for 7%.... Following the United States (27%), short-term securities issued in France made up 26% of the MMF assets at the end of 2021. Canada (19%), the United Kingdom (6%) and Germany (4%) complete the top five. Comparing the asset breakdown by base currency and issuing country shows that MMFs with the USD or GDP as a base currency invested a substantial proportion of their assets in securities issued in a non-base currency country. Often, countries such as Canada or Japan (or companies based there) issue short-term debt in a major currency to attract more international investors. MMFs can also invest in non-base currency-denominated debt and hedge the currency exposure. The MMFR does require all non-base currency exposures to be fully hedged." (See also our May 25 News, "ICI Publishes 2022 Fact Book, Reviews US, Worldwide Money Funds in '21.")
