Moody’s sees stable outlooks for money market funds in 2014
Moody’s outlooks for the money market fund (MMF) sector and asset manager sector are stable, says Moody’s Investors Service in its two new industry outlooks for 2014, although MMFs face wide-ranging regulatory changes.
Moody’s expects that improving macroeconomic stability will support markets and boost investor confidence, which together will stimulate growth of assets under management (AUM). Any market volatility arising from the Fed’s anticipated tapering of its bond purchases should be short-term in nature, and accommodative policies are likely to remain in place through 2014, said Moody’s.
“Investor anticipation of rising rates has already caused some mutual fund flows to move to equity from fixed income products,” said Yaron Ernst, Managing Director of Moody’s Managed Investments Group.
“The industry’s increasing equity asset allocation should boost revenues and further improve leverage metrics in 2014, but will be partially offset by regulatory changes that may weigh on managers’ profitability,” added Ernst. These include proposed constraints on distribution and compensation payments, and potential new rules that impose capital and liquidity adequacy requirements.
Moody’s also said it expects that the rising use of cheap passive “beta” products, including index funds and ETFs, will prompt traditional asset managers to develop products that deliver attractive risk-adjusted returns at a reasonable cost. Finally, merger and acquisition activity is likely to continue in the next 12 to 18 months, says Moody’s, as bank capitalization regulations and regulatory compliance costs continue to motivate asset sales and business divestitures.
The likely finalization of regulatory reforms in the coming year will be a key issue for money market funds, says the rating agency. Proposed regulatory changes in the US include a controversial requirement that non-government MMFs float their net asset values (NAVs) — instead of being traded at a constant dollar price. The large institutional investor base in the US is largely opposed to the proposed reforms and has indicated that MMF use would decline if any reform proposals are enacted.
But Moody’s said it expects that larger MMF providers would offer government MMFs or alternative products, mitigating the loss of prime CNAV business. In Europe, regulatory initiatives mean that new internal controls and policies-covering payments, capital, and liquidity requirements-will weigh on MMF profitability, as costs of complying with new regulations mount.
In addition, the persistent low interest rate environment will continue to pressure fund yields and dampen MMF managers’ profitability.
Fund managers will continue to focus simultaneously on both the low and high ends of the credit and maturity range, resulting in greater pressure on MMFs’ credit and stability profiles, Moody’s said. As a result, Moody’s said it expected that MMF industry consolidation will accelerate in 2014, as more small- to medium-size players exit the market. The new credit and operational requirements will put further pressure on MMF managers’ cost structures, and strengthen the advantages of large players with more scale.