Call that a money market fund?

July 27, 2009

Attempts to tidy up the European money market funds (MMFs) sector after last year’s turmoil have stirred up a hornets’ nest, with some providers arguing that the new definitions from trade bodies IMMFA and EFAMA don’t go far enough.

2008 was a testing time for the sector which sells a promise of providing instant liquidity with a little yield. In recent years so-called enhanced or dynamic MMFs promised extra yield by investing in securities with longer dated maturities or asset-backed securities that quickly became illiquid in the credit crunch.

When investors panicked and made a run on these funds, some broke the buck – like the US’s Reserve Primary Fund, whilst others had to suspend redemptions – such as BNP Paribas’s Parvest Dynamic ABS.

To try and restore confidence, and help investors make a distinction between the conservative funds and those that are more yield-seeking, industry associations IMMFA and EFAMA are reclassifying the European sector into “short term” MMFs, with weighted average maturities of 60 days or less, and “regular” MMFs, with weighted average maturities of up to a year.

Those funds running weighted average maturities of over a year – said to comprise some 100 billion euros in assets – will be thrown out of the sector after a lengthy transition period which runs until end-June 2012.

But market participants such as Laurie Carroll, of BNY Mellon Cash Investment Strategies, and Chris Oulton, CEO of independent MMF specialist Prime Rate Capital, argue that the double-headed definition is confusing as short-term and regular MMFs have very different risk profiles.

Oulton believes that “regular” MMFs shouldn’t be called MMFs at all: “A 12-month interest rate exposure doesn’t fit the expectations of the money market fund investor, which is that you should get your cash back when you want it, not a return on your cash.”

He says the two-pronged approach has come about because EFAMA’s members need to be accomodated – some of whom offer products with longer maturities than those that would meet the short-term MMF definition. “They have defended their industry – they are essentially tossing those running portfolios with maturities of longer than a year to the crowd to protect the providers with portfolios under a year.”

Marcus Littler, director of institutional liquidity sales at BNY Mellon Asset Management, questions whether the minimum 5 percent overnight liquidity position specified for short-term MMFs is high enough, given that many funds have had to run with 20-30 percent overnight liquidity to be sure of meeting redemptions.

Uneasiness also remains about the enhanced cash funds, which are seen as very different beasts to the short-term MMF. Carroll believes these were mis-bought. “With constant net asset value funds [the promise that most MMFs make] you need to be able to settle the next day, and I am not sure investors understood the risks they were taking with these funds.”

Surprisingly, given the problems experienced last year, in the last two months, she says she has seen clients starting to look at every basis point again, and seek out the higher yielding funds. “But you have to ask from an investment process point of view, how do they construct that portfolio? Clients should look at that. Some shops would be hard pressed to say what their process is.”

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