Security, liquidity and yield are the three watchwords of the money market fund industry. Prompted by...
A further boost to popularity is expected with the recent announcement by financial ratings provider IBC that it is to launch a European money market fund report.
The launch will be the first standardised European report of its kind which, according to managing editor Peter Crane, is long overdue. He says: "A battle is currently going on outside the US over the definition of a money market fund. Due to the lack of regulatory oversight, money market funds in Europe have had no forum for standardised yield or return calculations and have had no appropriate performance benchmarks."
The new weekly report will track money market funds denominated in dollars, sterling and euros. IBC says it plans to introduced yen-denominated funds in the coming months.
Given the absence of regulations governing money funds in Europe, the report will focus on US-style, AAA-rated money funds that abide by quality, maturity and diversification standards such as those required in the US. The funds tracked by IBC will be those domiciled in international financial centres, including Dublin and Luxembourg, and on the whole will be Ucits-registered.
United States influence
Not surprisingly, most of the fund management groups offering money market funds in Europe have US parents. The success of pooled cash management, or money market funds, in the US has seen assets under management grow by $55bn in the last four years, according to IBC, and are now circling the $1.6 trillion mark. This accounts for a quarter of the US mutual fund industry more than 1,300 funds, of which 500 are institutional.
Such growth in the US led to the Securities and Exchange Commission (SEC) introducing new legislation in 1983 to regulate this fast-growing asset class. Labelled Rule 2a-7, the regulation set out what risks money market funds could take to protect investors seeking safety of principal and liquidity. Once transparency was established, ratings of money market funds in the US quickly followed as institutional investors expressed concerns over just how closely funds were adhering to the Rule.
Now investment groups are hoping to replicate their US success in Europe. Chase Manhattan is among the many groups bringing their expertise of the money market industry to Europe . Since Chase introduced its first European money market fund less than four years ago, assets in its Dublin-based family of money market funds, Chase Manhattan Vista Funds, have increased from $500m to over $3bn.
According to Christian Yates, managing director, head of European sales for Chase, demand has been especially strong in the UK, the Netherlands, Germany and France.
"Some have been accustomed to using money market funds in their US operations while others have discovered they can get equal returns, far more efficiently, with money market funds rather than managing endless overnight investments," explains Yates.
Despite the current success in Europe, the concept is still relatively new and an ongoing process of education is needed if success is to be sustained. There is a certain amount of apathy among investors and there is a need to present an overwhelming argument for changing well-established investment structures.
According to Colleen McDermott, head of institutional funds at Merrill Lynch, there are three main concerns when it comes to getting the message across, and performance is not necessarily the first.
"The main concerns are security, liquidity and yield in that order," explains McDermott, who has been in Europe for seven months from the US, where she held a similar position. She says her ability to tap into Merrill's US office, where they have expertise in dealing with credit ratings above and beyond rating agencies, gives potential investors an added level of security.
Northern Trust Global Investment's vice-president of investment sales, Danny Sharp, also advocates using specialist managers. He says: "It is essential the money market manager has a high level of fixed interest experience, particularly in short-term duration instruments."
In terms of performance, there is little divergence in yields offered. Taking the euro money market fund sector yields from IBC's latest European Money Fund Report, the difference in yields on a seven-day simple gross basis is between 3.21% and 3.38%, while the seven-day Libid euro rate is 3.13%.
Sharp agrees that money market funds are not sold on performance. He says: "You get some performance pick-up, but it is more to do with the ability to maintain liquidity and risk management." However, money markets come into their own with the 'added value' service enhancements available. This is in contrast to the plan vanilla service offered by banks, according to McDermott, who says: "Banks are feeling the pinch as their cash management services can be more restrictive."
Typical features of money market funds include a sweep facility that basically consolidates a company-wide 'float' into a single holding, thereby reducing the cost of cash processing. At the same time, all investment roll-over and internal credit/risk compliance is facilitated by virtue of the fund's rating requirements and structure. Material benefits are therefore derived from time/cost savings, daily accountability and transparency.
On the investment management side, cash residuals from all managed funds/portfolios can be consolidated into the fund, as can dividends, tax reclamation and so on. Access is instant and redemption offered on a penalty-free, same-day settlement basis. The fund effectively emu
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