European MMFs Adjust Allocation Amid Supply-driven Constraints
Fitch Ratings reports in its European money market funds (MMFs) sector update that European MMFs have adjusted their allocation and tenor exposures, amid negative bank credit migration, which led to a notable rise in exposures to F1 rated issuers. Funds are seeking greater diversification through sovereign, quasi-sovereign, corporates and collateralised investments, as well as securities from non-eurozone banks. However, supply-driven constraints are particularly challenging for euro and sterling MMFs.
European MMFs have seen a rise in their allocation to issuers rated F1, or equivalent, following Fitch’s rating actions on large banks in Q411. The average F1+/F1 rating mix moved from around 80/20 in early-2011 to about 60/40 to date in 2012. Meanwhile, individual issuer allocations and tenors have been reduced to mitigate the increase in funds’ credit profiles resulting from banks’ negative rating migrations.
Combined with the continued deleveraging of the banking system, recent rating downgrades have also decreased the universe of securities MMFs are willing to invest in. Funds are attempting to balance these effects with investments in sovereign or quasi-sovereign entities, corporates and collateralised exposures. However, limited short-term high-quality issuance in these segments, notably in euro and sterling, constrains MMFs in their ability to further pursue this route.
After the removal of Greek, Irish and Portuguese exposures in 2009 and 2010, Italian and Spanish names followed the same path in Q411 across Fitch-rated European MMFS. At end-February 2012, funds were still maintaining large allocations to issuers from core European countries (France, Germany, UK, Netherlands), with increased investments in financial institutions from Australia, the Nordics, Japan and Canada.
Most MMFs continued to maintain a low weighted average maturity (WAM) in 2011, before showing signs of a slight increase in WAM over the first two months of 2012 (with medians at 29 to 36 days at end-February). Fund managers still maintain large short-term liquidity, and average overnight liquidity across Fitch-rated European MMFs stood at around 30% at the same date.
Euro MMF yields have declined sharply in tandem with declining euro short-term rates, while sterling and US dollar funds have benefited from the pick-up in related market rates. Wide MMF yield dispersion was observed across the three currencies, reflecting different portfolio positioning.
Fitch’s analysis is based on European MMFs rated by the agency, which represented €317bn at end-February 2012. Total European MMFs’ assets under management (AUM) stood at €1 trillion at end-2011. With €10.6bn of positive net sales, Q411 was the second consecutive quarter of positive net sales after nine consecutive quarters of declining AUMs. This asset growth trend has continued in 2012 to date.