MMF companies offering very-short term funds could face challenges finding assets, yield.
Once the Security and Exchange Commission’s new money market fund rules go into effect in October 2016, short-term assets could be in short supply. That’s because new banking rules along with government MMFs keeping a constant net asset value – prompting the large fund managers to migrate to them – will crimp the amount of available short-term assets.
Fitch Ratings expressed these worries recently in a report on low-volatility net asset value (LVNAV) funds being proposed in Europe. The LVNAV was offered as a concession to those opposed to moving to a floating NAV structure. “A new money market fund structure, proposed as a compromise between constant and variable net asset value funds, may face challenges in maintaining high diversification due to the growing scarcity of high-quality short-term investments,” Fitch said in a report. “This could make it harder for these funds to achieve and maintain ‘AAAmmf’ ratings than for other MMF structures.”
The LVNAV funds would be very short-term in nature, and allow an MMF “to issue and redeem units at a constant net asset value (CNAV) as long as this is within 20 basis points of its actual NAV, based on the amortized cost accounting approach for assets maturing within 90 days,” according to the European Economic and Monetary Committee (ECON)
Companies in the US have been moving in a similar direction, with fund managers offering 60-day and under funds, which would ostensibly keep the net asset value stable. However, unlike in Europe, the SEC is not allowing for amortized cost; and nor in most circumstances can they be advertised as stable.
But the problem as Fitch and others see it is that short-dated funds are in short supply. BlackRock recently express this in a letter to investors in announcing changes to its product mix. “Given the limited supply of short-dated government securities and the substantial contraction of the repurchase agreement markets, we are concerned about the potential for shortages in CNAV government funds,” BlackRock said.
Likewise Fitch said maintaining the value of these funds would be problematic. “We believe managing a fund under these investment guidelines [low volatility] in the current market environment would be challenging due to the growing scarcity of high-quality investment opportunities below three months,”
Fitch said. “This could make it harder for an LVNAV fund to keep its exposure to a single issuer below the maximum concentration levels set forth in Fitch’s criteria for ‘AAAmmf’ ratings, or those required by the proposed regulations.”
Fitch’s Greg Fayvilevich, commenting on the 60-day and under market in the US, echoed that sentiment. Many in MMF industry think the very short-term funds won’t work, “primarily because of the lack of supply,” Mr. Fayvilevich says. “Because of banking regulations the banks don’t want to issue securities that are very short-dated. So it’s not clear if there is enough supply to sustain a big market of under 60-day funds.” Another challenge, he said, is that in the current low interest-rate environment, “it’s very, very difficult to get the economics right. It would be difficult to get a good enough yield on the fund to make it worth it for the managers and the investors.”
Short-Term MMFs Could Be Liquidity Challenged
MMF companies offering very-short term funds could face challenges finding assets, yield.
Once the Security and Exchange Commission’s new money market fund rules go into effect in October 2016, short-term assets could be in short supply. That’s because new banking rules along with government MMFs keeping a constant net asset value – prompting the large fund managers to migrate to them – will crimp the amount of available short-term assets.
Fitch Ratings expressed these worries recently in a report on low-volatility net asset value (LVNAV) funds being proposed in Europe. The LVNAV was offered as a concession to those opposed to moving to a floating NAV structure. “A new money market fund structure, proposed as a compromise between constant and variable net asset value funds, may face challenges in maintaining high diversification due to the growing scarcity of high-quality short-term investments,” Fitch said in a report. “This could make it harder for these funds to achieve and maintain ‘AAAmmf’ ratings than for other MMF structures.”
The LVNAV funds would be very short-term in nature, and allow an MMF “to issue and redeem units at a constant net asset value (CNAV) as long as this is within 20 basis points of its actual NAV, based on the amortized cost accounting approach for assets maturing within 90 days,” according to the European Economic and Monetary Committee (ECON)
Companies in the US have been moving in a similar direction, with fund managers offering 60-day and under funds, which would ostensibly keep the net asset value stable. However, unlike in Europe, the SEC is not allowing for amortized cost; and nor in most circumstances can they be advertised as stable.
But the problem as Fitch and others see it is that short-dated funds are in short supply. BlackRock recently express this in a letter to investors in announcing changes to its product mix. “Given the limited supply of short-dated government securities and the substantial contraction of the repurchase agreement markets, we are concerned about the potential for shortages in CNAV government funds,” BlackRock said.
Likewise Fitch said maintaining the value of these funds would be problematic. “We believe managing a fund under these investment guidelines [low volatility] in the current market environment would be challenging due to the growing scarcity of high-quality investment opportunities below three months,”
Fitch said. “This could make it harder for an LVNAV fund to keep its exposure to a single issuer below the maximum concentration levels set forth in Fitch’s criteria for ‘AAAmmf’ ratings, or those required by the proposed regulations.”
Fitch’s Greg Fayvilevich, commenting on the 60-day and under market in the US, echoed that sentiment. Many in MMF industry think the very short-term funds won’t work, “primarily because of the lack of supply,” Mr. Fayvilevich says. “Because of banking regulations the banks don’t want to issue securities that are very short-dated. So it’s not clear if there is enough supply to sustain a big market of under 60-day funds.” Another challenge, he said, is that in the current low interest-rate environment, “it’s very, very difficult to get the economics right. It would be difficult to get a good enough yield on the fund to make it worth it for the managers and the investors.”