Global money market funds (MMFs) are set to lose around a third of their assets under management (AUM) next year, due to the combined impact of record low interest rates and new regulations according to Moody’s.
The credit ratings agency (CRA) predicts that the incoming rules from both US and European regulators could trigger outflows of at least 30%, with medium and small funds hit hardest should investors withdraw their money.
“If the regulation comes in as proposed we expect a 30% or higher decline of AUM because of the likely switch to variable net asset values [VNAVs] by most managers,” said Yaron Ernst, a managing director of global managed investments at Moody’s. “The AUM decline will especially affect small and medium-sized fund complexes that will be taking the hardest hit.”
Any further deterioration would come in addition to existing AUM declines due to the low interest rates regime of the past five years, which has added to the pressure on the already-thin margins of most MMFs. “Fees have already been waived for more than a year by most MMF managers, which reflects the stress on the industry’s business model,” said Ernst.
Moody’s reports that euro-denominated MMFs lost €127bn of assets over the two-year period June 2011 to June 2013, while HSBC estimates that the US industry has seen assets steadily decline from US$4 trillion in 2009 to about US$2.7 trillion.
Under US and European regulators’ proposals MMFs will adopt a new approach to pricing, potentially moving from a stable $1 or €1 net asset value (NAV) to one that will fluctuate according to the market value of the underlying investments.
European Union (EU) authorities also want MMFs to hold capital buffers equal to 3% of their investments, while the US Securities and Exchange Commission (SEC) wants to limit investors’ ability to withdraw cash from MMFs at a time of market stress, which it believes might either be preferable to a floating NAV or, alternatively, that both changes could be combined.
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