Investors in the €1.1tn European money market fund industry are facing losses as big managers prepare to pass on the impact of negative short-term interest rates.
Four of the biggest money market fund managers have told the Financial Times that along with the rest of the industry they are looking at ways of passing on negative returns to investors.
The funds are investment vehicles that are marketed as a way to keep cash safe, investing in “ultra-safe” short-term debt and bank deposits. They are used by investors who look to large asset managers such as Goldman Sachs and JPMorgan to invest excess cash safely.
But with interest rates on short-term French and German government debt in negative territory as investors scurry for safety, most money market funds now offer no yield to new investors. The European Central Bank (explain this) last month said it could start charging banks to hold their cash overnight, which means bank deposit rates may also turn negative.
“We are looking at various options, some of which may require changes to the fund prospectus and articles of association, that would allow us to continue operating during periods of negative yields,” said Jonathan Curry, global chief investment officer for HSBC Global Asset Management’s liquidity funds, which includes a €7bn European money market fund.
“If investors want to continue using a money-market fund if market yields are negative, they will need to accept the market is charging for investment options that target preservation of capital.”
Nearly half of euro money market assets are in funds that promise to maintain a constant net asset value, generally of €1 per share. As interest rates have fallen during the past year, fund managers have cut fees to meet that obligation.
The four fund managers told the FT that the ECB rate cut in July was a turning point, and led them to begin talking to investors about how to pass on negative yields without abandoning the constant net asset value.
The US asset manager Federated Investors said it had contacted the ECB and national tax authorities immediately after the July rate cut to discuss how that could be achieved. The fund manager said it had yet to receive definitive responses. The ECB was not immediately available for comment.
According to people in the industry options include reducing the number of shares investors’ hold in the fund to reflect negative income.
The Institutional Money Market Funds Association, a London-based industry body, said asset managers could also levy fees outside the fund structure to reflect negative yields without reducing the net asset value.
In the past money market fund managers have injected cash directly to maintain a constant net asset value, notably after the collapse of Lehman Brothers, when the value of many debt securities plunged. But asset managers say this is unlikely to be repeated to counteract negative yields.