Money market funds are facing “material challenges”, Fitch Ratings warns, highlighting volatile credit markets, eurozone uncertainties, historically low interest rates, the lack of asset supply and ongoing regulatory reforms.
The ratings agency expects fund managers to stay defensive but says the outlook is dependent on the credit conditions of financial issuers globally, given the lack of issuance in the non-financial sector.
Following the eurozone crisis, US managers have reduced or eliminated their exposure to European financial institutions. In turn, they have increased liquidity and holdings of treasuries.
Fitch says this “defensive credit stance” is likely to continue in 2012.
European money market fund managers, on the other hand, are expected to maintain large short-term primary liquidity in their portfolios against recession and eurozone sovereign risks.
“To limit credit risks, European money market fund managers are likely to stay focused on the most highly-rated financial institutions,” the report says, “while seeking to increase high-quality non-financial assets and secured investments such as repurchase agreements or high-quality asset-backed commercial papers.”
Money market funds in Europe have struggled this year and much of last year, though outflows have slowed somewhat in recent months.
In October, the sector saw €10.4 billion of outflows, compared to €11.6 billion in September and €54.2 billion this year so far, according to the European Fund and Asset Management Association.
©2011 funds europe
