Money market funds have struggled to recover from the impact of the credit crisis, suffering net outflows since the start of the year as investors switch back into equity funds, and also heavily into bond funds, which many perceive as a half-way house in terms of risk. Around $130bn (€95bn) has been taken out of money market funds this year, according to EPFR Global Fund Data, which monitors funds sold in most developed markets and offshore domiciles.
These outflows come hard on the heels of the bigger shakedown last year as the credit quality of many money market funds came under the microscope. Even funds that avoided the floating rate notes and subprime asset-backed securities still suffered when investors panicked and the market was hit by excessive redemptions.
Low yields
Top quality credit yields little, however. Money market funds currently yield around 10-12 basis points a year after fees for dollar-denominated funds, 30 basis points for euro funds and 60 basis points for sterling funds. This is unlikely to change in the near future. Most analysts expect interest rates to stay low for the time being, rising in the third or fourth quarter. “The conundrum for money market funds is that they are operating in an environment where it is hard to generate a return because rates are so low, and therefore these funds are primarily seen as defensive structures and liquidity vehicles,” says Johan Jooste, portfolio strategist, Merrill Lynch Wealth Management, Emea.
“They suffered mission creep in 2008, and at the height of the credit crisis there were all sorts of sins in these funds as managers tried to generate returns from impaired quality, illiquid and badly structured instruments,” he explains.
“While this aspect has now been sorted out, returns are exceedingly pedestrian, with the result that investors view them as somewhere to put cash, as an alternative to low risk deposits, to avoid being unlucky with one big bank. Investors are now intolerant of illiquid and opaque structures, and lots of clients are still skittish about risk.”
A growing market
However, providers say the overall market has been growing, in preference to the perceived risk of putting money on deposit with the banks. Although bank balance sheets are still being repaired and shrunk wherever possible, a significant number of investors remain extremely nervous about putting money on deposit with a single bank and do not have the economies of scale to diversify.
Chris Oulton, CEO, Prime Rate Capital Management, points out that the money market fund space has grown from $1bn to $500bn since 1998, according to the Institutional Money Market Funds Association. “A well managed and liquid portfolio appeals as a good alternative to relying on a few bank deposits as it is very difficult to diversify sufficiently widely, and uncertainty persists about the banking system,” he says.
Prime Rate Capital Management took the decision to list on its website all the holdings in its Prime Rate Cash Management UK fund, launched March 2008, with full details of the assets such as days to maturity, and Mr Oulton says that even if clients don’t use this facility, its existence is a comfort.
Last year, the most conservative funds gained market share as the strategies of their peers were laid bare. For example, the ING Liquid fund was €1.6bn in the first half of 2009 but had grown to €3.8bn by the end of the year.
“It is very conservative with 70 per cent in A1 plus securities – pure short-term with an average maturity below 60 days,” says Vincent Juvyns, client portfolio manager at ING Investment Management.
“A fluctuating NAV means that the fund can, in theory, have a negative daily yield, but the positive aspects, more transparency and mark to market valuation, can be seen in the credit crisis.”
Similarly, the HSBC Global Liquidity fund, has grown from E6bn last year to €12bn on the back of interest from corporate Treasuries, according to Regional CIO, Olivier Gayno. “At one stage Treasury departments were more confident with having deposits with a couple of banks, but now they think it is better to diversify more broadly, and entering into deposits with 50 banks is clearly impracticable. The fund attracts investors who are looking for more security than the average money market fund. Before management fees, it pays 45 basis points, compared with a peer group that averages around 50 basis points, or 47 basis points on the larger funds, and this is considered a small margin for the greater security.”
