European MMFs shift geographical focus, Fitch finds

Money market funds (MMF) in Europe have reallocated nearly one fifth of their portfolios geographically in the last two years, according to a new report by Fitch Ratings.

The necessity to consider a wider range of countries has been driven by bank rating downgrades, sovereign concerns, and a banks needing less short-term funding.

Fitch finds that nearly one in every five dollars has been moved from peripheral Europe, the US and the UK, to core Europe, the Nordic countries and, to a lesser extent, Asian and Middle East issuers. The total shift amounts to around €100bn.

The move comes at the same time as Euro-denominated MMFs struggle to meet their return targets in the current low rate environment.

Many have been reducing fund fees or refusing to take in new money until the situation improves.

Most recently Berenberg Bank in Germany cut the fees on its European strategy, while others such as JP Morgan Chase, Investec, Goldman Sachs, BlackRock and HSBC are refusing to take new money into theirs.

Last month Fitch voiced concerns that the increased need for MMFs to adapt to this situation through various measures is likely to lead to “significant disruption or outflows” from the industry.

The new report highlights the difficulty of gaining yield in troubled European counties. However, it is worth noting that European MMFs still retain large exposures to European issues.

Although geographical focus has shifted to stronger, less indebted European nations, Europe still accounts for around three quarters of MMF holdings.

Fitch believes that from now on fund managers will adapt their geographical exposure according to investment preference and volumes of issuance available in the fund’s base currency, rather than based on the country’s credit rating.

The geographical shift will be slow, Fitch adds. “Non-traditional” geographies are not expected to strongly dominate European exposure.

In September, only 12% of all Fitch-rated MMFs were invested in Middle Eastern issuers and 25% in Asian ex-Japan issuers.

Exposure to the Asia Pacific region is the growing the fastest, up 7% on average over the past two years.

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