The first multi-billion euro money market fund to experience a large outflow after its yield turned negative, managed the crunch without incident, a report by Moody’s says.
The study of the €1.6 billion outflow from the HSBC Euro Liquidity Fund that took place last week comes a month after regulators announced a study of systemic risk in asset management.
The net negative yield posted by the fund sent investors for the exits and marked the first time that a multi-billion euro prime constant net asset value, or CNAV, money market fund has fallen victim to the European Central Bank’s quantitative-easing policy, which has pushed yields to a record low, Moody’s says.
“The fund managed the outflow without incident, a credit positive, especially because Moody’s expects other funds to be similarly tested,” says Vanessa Robert, a Moody's senior credit officer.
“We expect more of the €90 billion prime CNAV MMF [money market fund] sector to turn negative in the coming weeks. This may create reallocations within the sector, but no outflows from the sector. MMFs continue to offer a good value proposition on a relative basis given that custodian banks are offering even more negatively yielding deposit rates.”
Investors were notified a few days in advance that the HSBC fund would start posting negative yields and responded by withdrawing roughly €1.6 billion, or 37%, of the fund’s assets under management, Moody’s says in its report called First multi-billion euro money market fund survives outflow from negative yield.
Despite the considerable withdrawals, says Robert, the fund operated in an orderly manner and maintained its conservative credit profile. The fund met all investor redemptions on demand by using some of its available cash positions and by selling a “vertical slice of the portfolio” to retain the diversity of the fund. All securities were sold at a profit.
A large portion of the fund’s redeemed assets were reinvested in competitors’ prime euro CNAV MMFs that are still offering nil or slightly positive returns.
In March, the Financial Stability Board and the International Organization of Securities Commissions published a plan for identifying non-bank and non-insurer global systemically important financial institutions. The project covers investment funds, including money market products.
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