2nd December 2019 – Fitch Ratings forecasts broad stability for the global money market fund (MMF) sector and ratings in 2020, underpinned by funds’ conservative credit, market and liquidity risk profiles.
Fitch-rated money funds tend to have high quality, diversified investments, appropriate liquidity relative to investor composition, proactive risk management by MMF managers and continued adherence to updated regulatory frameworks.
“Sustained, severe outflows could pressure ratings, although Fitch believes funds will broadly see continued growth in 2020, notably among funds adopting environmental, social and governance (ESG) strategies in response to emerging investor demand,” says Alexandra Kelly, Associate Director, Fitch Ratings.
US money fund assets under management (AUM) is likely to grow, with ESG-focused products capturing an increasing share of assets as investors place greater emphasis on responsible investing. The combination of relatively higher yields versus bank deposits and potential continued market volatility will likely spur steady demand for US MMFs in 2020. While the pace of growth may be slower in 2020, cash will likely continue to flow into the sector despite the Fed’s reversal in monetary policy.
In addition, repurchase agreements (repos) continue to dominate MMF portfolios, representing 32% of all outstanding money market securities as of Oct. 31, 2019. Fitch expects utilization of sponsored repo to continue to increase throughout 2020, especially considering that the number of sponsoring entities is likely to expand. Fitch-rated MMFs maintain limited exposure to any one repo counterparty.
Fitch anticipates European investor and fund attention to liquidity risk management will increase in 2020 when reporting on ESMA’s stress test guidelines takes effect. Weekly liquidity levels among Fitch-rated EMEA MMFs are overall sufficiently high. Based on a sample of 47 Fitch-rated MMFs’ liquidity levels at end-September 2019, 81% had sufficient liquidity to cover the redemption of their top two investor accounts, in line with the spirit of ESMA’s concentration stress test. For the 19% with weekly liquidity levels below the sum of their top two investor accounts, the top two accounts were typically either internal money or omnibus accounts consisting of multiple underlying investors, mitigating redemption risk.
“Fitch views a material disruption to money funds post a disruptive ‘no-deal’ Brexit as unlikely as most funds have been granted approval to temporarily continue operating and marketing in the UK if the passporting regime falls away abruptly,” said Alastair Sewell, Senior Director, Fitch Ratings.
Fitch expects the growth of Chinese MMFs to come under pressure in the short- to medium-term as a result of negative real yields, tight regulatory requirements and competition from certain wealth management products provided by banks. Total assets in Chinese MMFs declined to CNY7.1 trillion (USD1.0 trillion) by September 2019 from a peak of CNY8.9 trillion (USD1.3 trillion) in the second half of 2018.
“Recent stress at small regional banks in China highlights the credit vulnerability of these entities, and by extension, Chinese MMFs that invest in them. Thus far, the Chinese government has taken steps to moderate the effects on the broader financial system, but they may also seek to gradually weaken investors’ assumption of implicit state support and encourage greater differentiation of risk-pricing between financial institutions. These dynamics make it imperative for MMFs to choose their investments/counterparties selectively,” added Sewell.
The report, “Fitch Ratings 2020 Outlook: Global Money Market Funds,” is available at www.fitchratings.com
