Money Market Funds: A Global Story
by Mark Stockley, Managing Director and Head of International Cash Sales, BlackRock
According to a recent report for Q2 2011 jointly compiled by the European-based European Fund and Asset Management Association (EFAMA) and US based Investment Company Institute (ICI), investors held some $4.9tr of assets under management around the world in products described as ‘money market mutual funds’. These assets were held in a range of product types and currencies and domiciled in 42 countries around the world.
The three largest markets as stated in the report for money market fund products are firstly, the US with $2.7tr (55%), secondly, funds adhering to the Code of Practice of the Institutional Money Market Funds Association (IMMFA) with $648bn (13%), and lastly the French money market funds industry with $532bn (11%). French and IMMFA funds are registered as UCITS under European Union regulation with the latter principally domiciled in Ireland ($452bn) and Luxembourg ($192bn).
While the markets described above hold the greatest share of global money market fund assets, smaller but thriving money market fund industries exist in many countries around the world. As securities industry and banking regulation has evolved in developing countries such as China, India and Brazil, so have new domestic industries for money market funds and many global asset managers are excited by the prospect of providing investment solutions to cash investors in the years to come.
The major markets
The money market funds industry in the US is mature and well-established with products following a blueprint mandated by the Securities & Exchange Commission (SEC) and enshrined in Rule 2a-7 of the Investment Company Act of 1940. US-based money market funds seek to maintain a stable $1.00 constant net asset value (CNAV) per share at all times. IMMFA funds are typically offered as CNAV products closely resembling Rule 2a-7 money market funds but often with two types of share classes – the majority, known as ‘distributing’ classes declare daily income as dividends which is then paid out as cash or re-invested in new shares on a monthly basis, and a smaller proportion termed ‘accumulating’ classes which add daily income to principal thereby resulting in a steadily increasing share price.
In contrast money market funds offered outside the US and IMMFA industries can be relatively diverse in structure. For example, the largest single domestic market for money market fund products outside the US is France where all funds regulated by the Autorité des Marchés Financiers (AMF) have a variable net asset value (VNAV) per share. In the French market, money market funds follow rules introduced by European Union regulation in 2011 which now define two types of money market funds that can be classified as UCITS – ‘short-term money market funds’ and ‘regular money market funds’. The former follow more conservative guidelines than the latter, for instance with shorter instrument and portfolio maturities.
To understand the differences between the products offered in today’s major markets it helps to understand their evolution. In the US CNAV funds were first offered in the 1970s and steadily grew in popularity for both institutional and retail investors over the following decades culminating in their peak in early 2009 at a little over $4tr in assets under management. Initially US money market funds became popular with retail investors as an alternative to bank deposit products providing portfolio diversification, stability of principal, liquidity and money market rates of return. Over time money market funds became widely adopted by institutional investors as vehicles that could hold significant cash balances while providing diversified alternatives to single credit exposure via banking products. Today institutional money market funds comprise some 65% of US money market fund industry assets under management.