Managers must adapt MMFs to fit current environment, says Moody’s

Under the current low interest rate conditions, money market fund (MMF) managers will have to take steps to adapt their products, says Moody’s.

Money market funds have had a tough run in the past few months due to the extremely low interest rate environment in the Eurozone. Consequently, Euro-denominated funds have suffered to a much greater extent than those based in the US.

In July, Europe’s Central Bank cut its base interest rate by 0.25% to 0.75%, marking a new record low for the Eurozone.

These low rates have already forced a number of fund managers to take measures to ensure their money market funds remain attractive for investors and do not lose asset value.

The latest to cut investment fees on its Euro MMF was Germany’s Berenberg Bank. On October 15, it announced a reduction of the annual investment fee from 0.29% to 0.2%.

The cut was due to the “continued low interest rate environment in the Euro area, in which it is increasingly challenging to achieve an appropriate value for investors,” the manager said.

Others such as and JP Morgan Chase, Investec, Goldman Sachs, BlackRock and HSBC are among groups to have stopped taking new money into their funds altogether. By mid-October Moody’s estimated about €10bn was in these capped funds.

In a note, Moody’s outlines the possible actions that fund managers can take to mitigate asset reduction, beyond simply cutting fees or fund closures, and how this may impact the fund rating.

It emphasises that if fund susceptible to negative yields fails to take action to preserve its assets, they will probably be eroded over time, which would lead to a reduction in the fund’s rating.

Michael Eberhardt, senior analyst at Moody’s, says: “It is a challenging environment, but not to such an extent that funds would be unable to adapt. Many have come to the conclusion that they need to adapt and have the facilities to do so.”

The objective of the fund manager is to avoid deterioration of the fund’s net asset value. Moody’s sees fee waivers and declining new subscription as having a neutral impact on the fund’s rating, unless it indirectly leads to erosion of NAV.

For example, if a fee waiver leads to loss of a manager’s profitability, this could negatively impact the fund rating, from Moody’s point of view.

Another option is to change the fund’s structure by moving to a variable NAV from constant NAV. Fitch Ratings thinks the shift to VNAV is the most likely outcome. This course of action was advised in a report published last month by International Organization of Securities Commission (IOSCO).

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