Fitch on Euro LVNAV Viability
A statement entitled, "Fitch: Euro LVNAV Viability Now Hinges on Higher Interest Rates," tells us, "The launch of euro-denominated "low volatility net asset value" (LVNAV) funds now appears to hinge on a rise in interest rates, following the European Commission's statement on 2 February 2018 that share cancellation mechanisms will not be allowed under European money market fund (MMF) reforms, Fitch Ratings says. Without share cancellation or a change in the regulatory mindset, LVNAV funds will not be viable unless short-term euro interest rates turn positive. One-week euro LIBOR was -43bp on 2 February. Given low euro interest rates, euro-denominated constant net asset value (CNAV) MMFs routinely apply share cancellation to maintain a stable net asset value per share, an important feature for many investors. Most providers thought they would convert their CNAV funds to the new LVNAV fund category being introduced by the reforms, and saw LVNAV funds as central to their post-reform product line-up. But the launch of euro LVNAV funds is now in doubt unless short-term rates rise to the extent that such funds could sustainably deliver positive yields and thus avoid need to apply share cancellations." Fitch adds, "A key attraction of the LVNAV fund type for investors is its ability to offer a stable price per share provided certain conditions are met. However, while short-term rates remain low or negative, euro CNAV providers may have little option but to convert to VNAV MMFs. We estimate assets under management of about EUR100 billion in euro CNAV MMFs. The launch of LVNAV funds in US dollars and sterling does not appear at risk, given the higher short-term rates for these currencies. We estimate about USD350 billion in US dollar CNAV funds and GBP220 billion in sterling CNAV funds." (See also our Feb. 5 News, "EC Letter Bans Reverse Exchanges in New European Money Fund Regs.")
