Moody's Investors Service released an "Industry Outlook report entitled, "Asset Management Industry: 2009 Review and 2010 Outlook" yesterday which says in a press release that the "Outlook [is] still negative for global asset management industry. While the 19-page report doesn't focus on money market funds, it does include a couple of pages on "cash."
Senior Vice President and US Team Leader of Moody's Global Managed Investments Group Dan Serrao says of the broader fund industry, "In the last couple of years, investors have watched the industry lose a great deal of their money and so they are now opting for lower risk fixed income products and more passive, lower-fee forms of money management, like ETFs, which squeeze the managers' revenue yields.
The Outlook says, "Money market fund managers are facing nearly the lowest yield environment possible, which is crimping the profitability of this important asset class. The slowly declining balance of money in money market funds over 2009 indicated improving willingness to come back into the market, but still, the amount of money in money market funds today (about $3.1 trillion in the U.S. and about $5.5 trillion globally) remains about 50% higher than levels seen in 2006. Money market funds are likely to hold an elevated level of importance as a key allocation within investors' portfolios and floating NAV funds may gain more acceptance. The costs of managing these funds will continue to be challenging, even for scale players."
On "Changes to Rule 2a-7," the Moody's report writes, "Over $3.1 trillion of assets are managed by money market fund (MMF) managers. These managers face a new set of SEC rules for MMFs that will be mostly phased in over the coming year. When the SEC's new liquidity rules go into effect on 28 May 2010, MMFs will be required to have at least 30% of their assets mature within seven days. We believe that the rules are manageable, but incrementally, there will be higher costs to managing MMFs and yields will be constrained by the risk and liquidity limits."
It continues, "The recent announcement by the Fed to permit large funds to enter the reverse repo market will help to offset these issues. MMFs will benefit from an increase in supply of high-quality assets at a time when the supply of safe assets has contracted. We view this benefit to be of greater importance to MMF credit profiles than a rise in absolute fund yields."
Finally, Moody's says, "While capital requirements are not part of the ruling, we believe that capital capacity will increasingly be a consideration in evaluating managers. Most of the very large money market fund managers will not be materially affected any potential increase in interest in the balance sheet qualities of money market fund managers."
