Investec latest to cap money market fund after ECB rate cut

Investec has become the latest asset manager to close its European money market fund to new subscriptions, as the troubled sector struggles to cope with the European Central Bank cutting its deposit rate to zero this week.

The directors of the Euro Liquidity Fund said it would temporarily close to new monies, until further notice.

In an announcement, the board of the fund said the closure occurred after it discussed the ECB 0.25% rate reduction and “consequences for the Euro fund”.

Investec said the cut “will make it very difficult to manage the Euro fund within the investment guidelines without having a negative effect on the capital and yield [of the fund] if subscriptions requests continue to be accepted”.

It was therefore “in the best interests of the existing shareholders” to cap the fund, the board added.

The problem arises due to the extreme low interest rate environment, and managers having to ‘put money to work’ in this climate.

Bob Parker, senior advisor asset management at Credit Suisse, yesterday cast doubt over the future of the money market fund sector as a source of funding in the prevailing zero interest rate environment.

Fitch said more funds could have to cap new subscriptions, or cut their fees, to keep a positive yield.

It would be easier for them to generate returns if they could put new money into instruments only after rates have risen, said Alastair Sewell, director in the fund and asset manager rating group at Fitch.

He pointed to the probability the cutting of the Euro overnight index average (Eonia) to historical lows would soon leave overnight bank deposits in Europe paying “between -15bps and 5bps [so] there is a risk of money market fund yields turning negative.

“In this environment, the decision by some funds to temporarily close to new investments is a prudent one to protect existing investors and will not have any direct impact on ratings,” he added.

Investors in Investec’s fund will continue to be allowed to redeem daily, and price calculations will still be made, the board said.


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