Euro cash funds to cap inflows and cut fees as low rates bite, says Fitch

Investors in money market funds denominated in euros face curbs on liquidity and changes in fee structures, after the European Central Bank’s decision to halt interest payments on its deposit facility.

The tumultuous changes, now expected by analysts at Fitch Ratings, would mirror those that hit some US cash funds at the height of the credit crisis in 2008.

The moves would effectively be prompted by the ECB’s recent cut of its deposit rate to zero, pushing the Euro overnight index average (Eonia) to historical lows, and leaving most overnight bank deposits paying between -0.15% and 0.05%.

Funds taking inflows would typically put new money to work, initially at least, on overnight basis, at such low rates.

European money fund managers could cap funds to new inflows and lower fees, to keep yields positive in such an extremely low interest rate environment, Fitch said.

In addition, yields on core government debt worldwide, from Treasuries to Bunds to Gilts, is at or near zero at the long end, and has been negative on shorter-dated paper.

Alastair Sewell, director in Fitch’s fund and asset manager rating group, said some funds active in the debt arena had cut fees and closed to new monies,”and [a handful of those] in the credit space have entered a soft close so far. We understand other fund complexes are considering closing to new subscriptions”.

Fitch said capping and fee cutting “will help protect existing investors from potential negative yields, [and] the high cost investors pay for liquidity in the current environment could increase the demand for products that have a longer investment horizon.

“Not all of these strategies may be able to withstand liquidity shocks commensurate with a ‘AAAmmf’ rating and would therefore more likely be rated ‘AAmmf’ or ‘Ammf’.”

Fitch said the caps on funds would be a “prudent” move.

“These tend to last until the current portfolio has matured and is reinvested at prevailing rates, at which point new investments no longer pose a risk of dilution for existing investors.

“Experience in the US tells us that fee waivers will be the next development. These will probably come first at banking groups that offer MMFs as part of their multiple services to corporate and institutional customers, while managers that see MMFs primarily as a profit centre are more likely to resist lowering fees if possible.”

Fitch said the low rates in effect now leave investors paying a “particularly high cost” to hold highly liquid portfolios.

On Fitch’s analysis allocators pay 0.2% to 0.3% for high liquidity in their investments.

“This high liquidity premium means certain MMF investors are increasingly willing to compromise on liquidity or duration risks in their portfolio, but not on credit risks, leading to increased demand for MMFs with longer investment horizons.”


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