4th November 2013

Fitch: Euro MMFs Increase Exposure to Highly-Rated Banks, Quasi-Sovereigns

Fitch Ratings' 3Q13 quarterly report on euro money market funds (MMFs) shows higher allocation towards top-held 'F1+' banks and quasi-sovereigns, amid a portfolio rating mix dominated by 'F1' issuers, and a lengthening of portfolios' average maturity to compensate for low yields.

Fitch-rated European MMFs denominated in euros have on average about half of their portfolio assets concentrated in 20 entities, led by Rabobank (AA/F1+) and other highly rated banks, such as Nordea Bank, HSBC, Svenska Handelsbanken, or Standard Chartered Bank (all rated AA-/F1+).. 'F1'-rated banks, such as Barclays, BNP Paribas and Credit Agricole, saw the biggest fall in fund allocation over the past year, although they remain among the top held names, notably as repurchase agreement counterparties.

Yet, the average portfolio rating mix is now showing a predominance of investments rated 'F1', or equivalent, at 54% of portfolios on average, up from 35% until June this year. This is due to the downgrade of France's Long-term Issuer Default Rating to 'AA+' in July, followed by the downgrade of the most widely held French banks to 'F1' from 'F1+'.

Portfolio diversification outside of the financial sector, which accounts for about 70% of portfolio assets, is constrained by limited supply of high-quality short-term issuance. MMFs continue notably to have appetite for sovereigns, supranationals and government agencies assets, now at 12% of portfolios. Corporates also account for 12% of euro MMF portfolios, and have been stable over the past year given the low issuance of 'F1+/F1' or equivalent short-term assets. New corporate issuers have been added to euro MMFs, notably Procter & Gamble and BMW.

The weighted average life (WAL) of MMFs has been increasing at a steady rate over the past 12 months, to 55 days from 49 days on average. This reflects MMFs' more barbelled strategy in the current ultra-low yield environment with an increased allocation towards longer-dated assets, while maintaining high short-term liquidity. Portfolios' weighted average maturity (WAM) has remained broadly stable over the same period, at around 35 days on average. MMF managers do not expect any short- to medium-term changes to the current low money market rates.

Overnight and weekly portfolio liquidity remained at high levels (on average at 28% and 36% of fund's assets, respectively), despite having decreased during the year. Portfolio liquidity is also comfortably above the maximum average weekly outflows observed over a month period at individual fund level, which represented 8% of funds' assets.

Fitch's analysis is based on euro MMFs domiciled in Europe and rated by the agency, which represented EUR49bn at end-September 2013. At the same date, assets in the euro-denominated constant net asset value (CNAV) MMFs industry totalled EUR78bn. France-domiciled MMFs, another large segment of the European MMF universe, represented EUR137bn at end-September. Both segments have experienced some asset contraction during the year, of 25% for CNAV funds and 32% for French MMFs.

The full report, entitled "European MMF Quarterly - Euro - 3Q13", is available at www.fitchratings.com. It is part of a suite of MMF quarterly reports covering euro, sterling and US-dollar funds.

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