With less than two months to go before our European Money Fund Symposium (Sept. 25-26 in Paris, France), Crane Data will be ramping up its news coverage of money market funds outside the U.S. Today, we review a new article on Chinese money funds, and we also quote from a recent teleconference on European money funds. The website Asian Investor writes "Fears rise over China money market fund risks." The article says, "Money market products account for 51% of China's mutual fund assets, and Tianhong's Yu'e Bao makes up nearly a third of MMF assets. Analysts are worried about concentration risks."
The site explains, "Fears continue to rise about the concentration of risk in China's swelling money-market funds, as they increasingly dominate the country's mutual fund landscape. Tianhong Asset Management extended its lead as the biggest mutual fund house in China in the first half of 2017, thanks to a dramatic 80% increase in assets at Yu'e Bao, its money market fund (MMF)."
Asian Investor writes, "Yu'e Bao now accounts for 28% of China MMF AUM, with the next two biggest -- both ICBC Credit Suisse products -- according for 7% between them. Tianhong's Assets under management (AUM) totaled Rmb1.5 trillion as of June 30 for a 15% share of the Rmb5.1 trillion($752 billion) mutual fund market, compared with 9.22% at the end of 2016. Yu'e Bao makes up 90% of Tianhong's AUM. It is now the world's biggest MMF, having surpassed the JP Morgan US Government MMF in the first quarter of this year. MMFs as a whole now contribute 51% of all mainland mutual fund assets, according to the Asset Management Association of China."
It continues, "The high concentration in MMFs is cause of worry for some analysts.... MMFs began growing rapidly in China from the second half of 2013 thanks to strong retail demand, not least via Yu'e Bao. Institutional Investor demand drove a second wave of development in the second half of 2015, as stock markets turned volatile and banks sought to outsource some of their cash management, said Huang Li, co-author of [a] Fitch Report."
Finally, the piece says, "It appears that regulators are looking to dampen the rapid growth of MMFs. Yu'e Bao has been forced to cut its Rmb1 million ($145,000) investment cap to Rmb250,000 since late May.... In addition, the China Securities Regulatory Commission (CSRC) began consulting in March on strengthening the rules for the liquidity management of MMFs, particularly institutional MMFs with concentrated investor bases."
In other "offshore" news, Fitch Ratings recently hosted a webinar entitled, "European Money Fund Reform Finalised; What Happens Next?" The recording's description says, "Fitch Ratings held a teleconference to discuss European money market fund reform. The reforms were signed into law on 30th June 2017 with the implementation period starting 20 days later -- Thursday 20th July 2017. The reforms will herald important changes to the European money market fund landscape which investors will need to understand and update investment policies and practices."
Fitch's Evangelia Gkeka, explains, "European Money Market Fund Reform means that the existing money funds will cease to exist in their current form.... I will focus on the [new types of] funds available to short-term investors and their main features and characteristics. I will also briefly discuss the impact of the new regulations in asset management and their credit and risk management."
She continues, "The types of funds [include]: LVNAV funds, or low volatility NAV funds, short-term [MMFs], and standard VNAV funds. There are certain factors that differentiate ... funds from one another, [including] maturity profile, liquidity, diversification and valuation. Starting with public debt CNAV funds, which are categorized as short-term money market funds, this fund has 99.5% of their assets issued in government issued and guaranteed paper, repo but by government issued and guaranteed paper and cash.... The next category is again a short-term money market fund named Low-Volatility Net Asset Value Fund, or LVNAV.... Both of these fund types will be subject to liquidity fees and redemption gates, if liquidity [falls] below specific thresholds."
Gkeka adds, "The remaining two fund types, the short-term VNAV and standard variable net asset value, already existed pre-reform. These account for approximately 15-35% of the market respectively. As a result of the reform, CNAV funds will need to convert to one of these 4 fund types. From the conversations that I've had with asset managers, we will anticipate the majority of CNAV's will opt to convert to LVNAV. This will allow the fund to maintain a stable net asset value which is what investors of CNAV are used to, however the type of restrictions LVAV funds have, can cause a few CNAV to rather opt to become short-term VNAV."
Finally, Fitch's Alastair Sewell comments, "Changes are ahead for the short-term investors ... in Europe.... So what really matter here is the measurement and the segment of the risks embedded in the portfolio of the money market fund. [R]eform ... changes the funds available in Europe and the ... different fund types, but that doesn't necessarily matter so much if the risk embedded in the fund itself doesn't change.... In terms of timing ... just a reminder that [it] is the 21st of July of 2018. That's next year for new funds and the 21st of January of 2019 for the conversion of existing funds."
