MMF sales go up as counterparty lists come down

European money market funds have seen the second quarter of positive net sales after nine consecutive quarters of declining assets under management.

According to ratings agency Fitch MMFs it rates saw EUR10.6bn of positive net sales in the last quarter of 2011 with asset growth continuing this year. And the funds are still seeking very high quality paper and finding diversification through sovereign, quasi-sovereign, corporates and collateralised investments, as well as securities from non-eurozone banks.

Philippe Renaudin, Head of the European Money Market Investment Team at BNP Paribas Investment Partners commented: “In our AAA-rated Prime Money Market Funds, the investment universe has kept shrinking these last months.”

Downgrade processes from the ratings agencies (with 114 financial institutions under review with negative outlook from Moody’s) have meant that Renaudin’s team have removed issuers expected to be downgraded to A-2 / P-2 / F2 short-term ratings from its buy-list.

“The consequence is that our exposure to sovereign issuers (government, public agencies, state-owned companies and banks, supranational organisations…) has sharply increased,” added BNP investment specialist Gregory Chereau. “In our flagship fund BNP Paribas InstiCash EUR the weight of sovereign issuers moved from 26.8% as of 30 December 2011 to 40.4% as of 30 March 2012.”

Marcus Littler, a managing director at BNY Mellon agrees. The industry only really has faith in UK and German paper at the moment, in terms of sovereigns, with a little bit of France mixed in, he said. “So while our pool of investments has shrunk there are few outflows and corporate treasurers still have a lot of cash, so we have to go out and find paper for the portfolios,” he said.

A further problem with banks is that they are being asked to lend on a longer basis because of capital adequacy issues. “We may find financial paper to our liking but they’re not issuing the durations we’re looking for,” added Littler.

Finding corporates to invest in is difficult too for a couple of reasons, said Chereau: “Only a few of them have the minimum rating required, and those that are eligible are currently cash rich, with a limited interest for short-term issuances.”

Funds in the Fitch universe have large allocations to the core European countries of France, Germany, UK and the Netherlands and are also investing in financial institutions from Australia, the Nordics, Japan and Canada.