Moody's Investors Service just published a report entitled "French MMFs' H1 asset contraction exceeds that of European peers," which explains, "French money market funds (MMF) lost about 12% of their assets under management (AUM) in the first half of 2022, more than their European peers. This reflects investor withdrawals in response to rising inflation and to satisfy margin calls triggered by Ukraine-related energy market turbulence. The average asset quality of French MMFs has improved as geopolitical tensions have encouraged investment in low-risk assets. However, French players still hold a higher proportion of lower-rated securities than rated European peers, mostly domiciled in Ireland and Luxembourg. The French MMF market remains highly heterogeneous, consisting of a handful of dominant players and a large number of smaller entities with varying risk appetite." (Note: Thanks again to those who attended our European Money Fund Symposium in Paris! Watch for excerpts and quotes from the event in our October Money Fund Intelligence newsletter.)
Author Vanessa Robert tells us, "French MMFs' combined AUM fell by €45 billion in H1 2022, a decline of about 12% relative to the end of 2021.... The contraction reflected customer redemptions in response to inflation, which erodes the already relatively low return on money fund investments, and expected interest rate increases, which create higher yielding alternative investment opportunities. Some MMF investors also faced margin calls on energy market positions after the Ukraine conflict triggered a surge in energy prices. While these factors affected all MMFs, the French industry's AUM contraction exceeds the 9% decline that has affected the European sector as a whole."
She writes, "The French MMF market has also undergone a degree of consolidation as a number of smaller sponsors have exited the industry after regulatory changes introduced in 2018 led to an increase in costs. This has reduced the total number of sponsors to 33 from 54 in 2018. The French market is now relatively concentrated, with the biggest single sponsor managing close to 40% of total MMF assets, and the five largest over 80%."
Moody's tells us, "Banks are well represented among the larger sponsors, reflecting the French MMF industry's historical origins as a means for banks to help clients avoid an interest rate cap on term deposits imposed in 1981. The average French money fund has increased to €3.8 billion from €1.7 billion in 2018, but remains well below the €6 billion average for our rated euro-denominated funds. The size disparity between French MMFs is indicative of the sector's heterogeneity. The market spans the full spectrum from large to small, and encompasses both conservative and more aggressive investment strategies."
They comment, "All French MMFs are Variable Net Asset Value (VNAV) funds, even though constant net asset value (CNAV) and Low Volatility Net Asset Value (LVNAV) funds have been permitted in France since 2018. Most French MMFs (80% of AUM) follow the standard VNAV model, reflecting its yield advantage, which matches the priorities of French MMF investors. A large majority of these investors are domestic, with French insurers accounting for about one third of total assets. Almost all French MMFs are euro-denominated."
Under a section named, "Asset quality improves," they say, "Credit spread widening and Ukraine-related flight to quality have led to an improvement in the average asset quality of French MMFs. Short term funds have increased their holdings of highly-rated P-1 assets, while standard funds have cut their exposure to low-rated instruments. This reverses a measured deterioration in asset quality last year as the COVID-19 crisis eased, encouraging increased exposure to riskier but higher yielding assets.... At the same time, rising central bank rates and widening credit spreads have encouraged more investment in short-dated assets, which allow funds to capture the benefits of future rate rises. This is reflected in a decline in French MMFs' weighted average maturity (WAM) and weighted average life (WAL)."
They also tell us, "The average liquidity of both standard and short term funds comfortably exceeds the regulatory minimum, on both a daily and a weekly basis.... However, median liquidity is closer to the regulatory threshold, indicating that some players, most likely smaller entities, operate with a relatively narrow liquidity buffer. The median is particularly close to the regulatory minimum for standard funds. Low liquidity and credit quality explain why one French MMF was forced to suspend redemptions in April 2022 because of its exposure to Russian issuers."
Moody's adds, "French funds continue to carry greater credit risk than euro-denominated MMFs rated Aaa-mf, which have almost no exposure to assets rated below P-1. In contrast, lower-quality P-2 and P-3 instruments account for almost 30% of French short term MMFs portfolios. The French MMF sector's greater credit risk is further reflected in its higher exposure to relatively long-dated assets. French short term funds have both higher WAL ... and weaker liquidity metrics, with overnight liquidity accounting for 23% of their portfolios on average versus 30% for rated peers. However, their WAM is materially lower than that of rated peers, driven by increased use of interest rate swaps this year to limit sensitivity to interest rate change."
Finally, they write, "Almost 90% of French MMFs meet the definition of promoting environmental social and governance (ESG) characteristics under Article 8 of the European Union's Sustainable Finance Disclosure Regulation (SFDR), up from 77% last year. This compares with 43% and 20% for rated funds. The gap partly reflects the stronger representation of public debt Constant Net Asset Value (CNAV) funds among the rated subgroup. These funds invest solely in government debt, which makes it difficult for them to be guided solely by ESG considerations."
