The Continuing Popularity of Constant NAV Money Market Funds
by Joanna Cound, IMMFA Distribution Committee Chair
Money market funds are used by institutional investors as a treasury management solution for short-term cash balances. They are designed to deliver security of capital and liquidity, and allow investors to benefit from professional cash management services. Their usage tends to increase when investors need greater security or certainty of the liquidity of their investment. In Europe and the US, total balances invested in money market funds peaked in Q2 2009 and Q1 2009 respectively. Since that time, there has generally been a steady outflow of cash, as the appetite of investors for yield returns, and banks have begun to actively seek additional deposits. However, contrary to this general outflow, balances invested in the money market funds represented by the Institutional Money Market Funds Association (IMMFA) funds have continued to increase. Indeed, since the inception of the Association in 2000, the total assets managed by IMMFA funds have increased every year. Whereas other parts of Europe have been witnessing an outflow of assets since Q2 2009, IMMFA funds have grown by 9%. How can that be? What makes IMMFA funds so different from their continental counterparts?
Benefits to investors
Money market funds have increased in size over the years because of the fundamental benefits they provide to investors. All money market funds seek to provide security and liquidity, and the provision of these two objectives is partly achieved through the diversification of risk which a collective investment delivers. Money market funds therefore provide a viable short-term cash management solution, with access to professional cash managers. Constant net asset value (NAV) money market funds also have an additional benefit: by maintaining a constant value, the accounting and taxation rules which are applicable to any investment in such a money market fund are simplistic, more so than any investment which changes in value. If a treasurer invests a pound in a constant NAV money market fund, the proceeds upon redemption should be exactly that: a pound. This simplicity eases the administrative burden on investors, thereby increasing their attractiveness.
Constant NAV money market funds offered by IMMFA members also benefit from having a triple-A rating from one or more of the independent credit rating agencies (Fitch Ratings, Moody’s Investors Service and Standard & Poor’s). This rating is an independent opinion on the ability of the fund to provide security and liquidity, with the triple-A rating being the highest which can be awarded. This is further supporting evidence that IMMFA funds are able to deliver against their objectives.
Given these benefits which IMMFA funds provide, they are used by a variety of investors from across the globe. This breadth in both the type and location of investors is testament to the success of the product in delivering against its objectives.
If a treasurer invests a pound in a constant NAV money market fund, the proceeds upon redemption should be exactly that: a pound.
As we track the location of investors in IMMFA funds, it is clear that there is increasing investment from those locations which have historically favoured the variable NAV money market fund model. Within IMMFA funds, the proportion of investment received from European investors (excluding the UK) where variable NAV money market funds have historically been used, increased from 30.0% to 31.4% from December 2009 to June 2010, during which period the total assets managed in IMMFA funds increased by 3%, making this increased contribution more sizeable in real terms. The growth included French based investors, who increased their relative share of IMMFA funds from 0.59% in December 2009 to 0.85% in June 2010. The French market has historically been the largest market for money market funds in Europe, but in recent months, IMMFA funds have grown larger than their French counterparts (at December 2010, the French market totalled €394bn, whereas the IMMFA market totalled €466bn).
Some of this overall growth may be attributable to the fact that the European market for constant NAV money market funds is less mature than that in the US. Whereas constant NAV money market funds have been in existence in the US for 40 years, they did not arrive in Europe until the mid-1990s. The European market can therefore be seen as still developing when compared to its US cousin. This helps to explain some of the additional investment received in IMMFA funds in recent years as greater numbers of treasurers – including some who have historically used other money market funds – become familiar with the product and place cash.