At this week's European Money Fund Summit, which took place in Frankfurt, Germany on Monday and Tuesday, Moody's Investors Service unveiled an update entitled, "JPMorgan Liquidity Funds: Launch of Share Class aims to Manage Low/Negative Yields." The piece says, "In response to the European Central Bank's decision to lower its deposit facility rate to zero in July, and the potential risk of further rate cuts, JPMorgan Asset Management has launched a new type of share class in two of its Euro-denominated money market funds (MMFs) replacing the existing distributing share class. The new flex distributing share class will be introduced in two sub-funds of the JPMorgan Liquidity Funds umbrella: the Euro Liquidity Fund (rated Aaa-mf) and the Euro Government Liquidity Fund (rated Aaa-mf) and will effectively replace the Funds' distributing share class. The existing distributing share classes in the Euro Government Liquidity Fund will close on 19 November and on 19 December for the Euro Liquidity Fund."
Moody's explains, "Current shareholders of the existing distributing share class are offered the following choices (1) switch into the new flex distributing share class; (2) switch into the existing accumulating share class; or (3) redeem their shares. Based on the current portfolio characteristics of the Funds, we rate the Funds Aaa-mf. The ratings on the Funds are not expected to be changed solely due to the Share Conversion, based on: 1. The Funds' offer to their current distributing class shareholders to redeem their shares at par before the S hare Conversion date; 2. JP Morgan Asset Management's plan to maintain sufficient liquidity to ensure that all redemption requests from investors of the distributing share class can be settled timely at par; and 3. JP Morgan Asset Management's commitment to maintain a portfolio credit profile and a portfolio stability profile consistent with Aaa-mf characteristics throughout the Share Conversion process. Until the Share Conversion takes place, we will closely monitor the Funds' liquidity position and out flows to detect any liquidity pressure that might impact the Funds' ratings."
The update continues, "[O]ver the past two years, the persistently low yields offered by high-quality, short-term investments have remained a challenge for MMF managers seeking to generate a positive yield whilst maintaining a stable NAV and providing daily liquidity for their investors. The ECB's decision to lower its deposit rate to 0.00% on 5 July 2012 has driven yields on high-quality, short-term cash instruments into negative territory in Europe. This movement of yields on high-quality, short-term investments into negative territory has exerted further pressure on MMF managers to maintain investor principal, whilst also providing them with access to daily liquidity and exposure to the lowest overall credit risk."
Moody's adds, "To date, the Funds have not invested in securities with a negative yield and JPMorgan Asset Management is targeting to keep the gross yields of the Funds above zero after the introduction of the new share class unless a trigger event pushes levels further down. In response to this anticipated negative-yield environment, MMF managers have started taking various actions -- beyond fee waivers -- that include restricting subscriptions, restructuring or closing down funds."
The piece says, "In this context, JPMorgan Asset Management, amongst other fund managers such as Goldman Sachs Asset Management, BlackRock, and others, decided to restrict subscriptions into its two Euro-denominated MMFs in July, whereby no new investments would be accepted, whether from new or existing shareholders. This strategy deferred the impact of low yields by reducing the immediate need to buy into the very-low-yield market environment."
Finally, Moody's Vanessa Roberts and Yaron Earnt write, "Furthermore, in anticipation of the potential risk that the ECB might make further rate cuts, JPMorgan Asset Management announced on 17 October that the structure of these two Funds will be changed with the introduction of a new share class with a reduced-share mechanism and the closure of the existing distributing share class. The share class closure will be effective on 19 November for the Euro Government Liquidity Fund and 19 December for the Euro Liquidity Fund." (See also our Crane Data Oct. 19 News "World Turned Upside Down: JPM Flex Class For Negative Euro Rates".)
