Although it is expected money market funds will manage their portfolios conservatively with respect to credit, interest rate and liquidity risks, they are taking a little bit of risk when it comes to diversifying their investments. According to Fitch Ratings, MMFs have been slowly ramping up exposure to emerging markets. Granted, Fitch said, these to some of the more highly rated emerging market banks.
Fitch said in a recent report that it expects this trend continue due to the constrained supply of high-quality short-term assets in core markets. Overall the trend toward greater global diversification is expected to continue. This is due to managers wanting to spread risk away from “traditional issuers in North America, Europe, Japan, and Australia,” all of which continue to suffer the aftershocks of the financial crisis.
“We believe many fund managers likely view emerging markets in small doses as a reasonable investment alternative, at a time when historically low yields across all traditional short-term asset classes are depressing returns and forcing consideration of noncore investments,” Fitch said in its report. According to Fitch, MMFs had invested approximately $6 billion in advanced emerging economy banks (primarily in Chile, Korea, and Singapore) as of October 31.
Navigating a low-yield environment will continue to be a challenge for MMFs in 2013, Fitch said. The rating agency noted that headline risks from Europe will further test MMFs in the coming year. Despite these challenges, Fitch has said MMFs were “adequately positioned” to face them along with the ongoing regulatory uncertainty in 2013. Currently the Securities and Exchange Commission and the Financial Stability Oversight Board are trying to figure out a way to proceed in regulating MMFs. As regulators currently see it, MMFs are a weak link in the financial world, vulnerable to runs and other problems.
To highlight its point about MMFs, the SEC reported in December that since 1989 nearly 160 MMFs have sought the SEC’s permission to shore up their funds using cash from their parent companies. This does not include requests made during the financial crisis years, according to the SEC. Still the MMF numbers pale compared to bank failures over the years, according to data from Institutional Cash Distributors. Only two MMFs have failed since 1971, while well over 400 banks have failed since the financial crisis began, said ICD.