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European money market funds still cautious


European money market funds remain cautiously positioned on the yield curve while they continue to proactively and selectively adjust their exposure to some European countries, says Fitch Ratings in its latest European Money Market Funds Quarterly newsletter.

The report analyses market developments, reviews the benefits and drawbacks of fund portals and discusses the use of putable assets in money market funds.

"MMF managers have continued to proactively adjust their exposures and maturity limits to debt issued or guaranteed by financial institutions and governments from those European countries that have remained under market pressure," says Charlotte Quiniou, director in Fitch’s fund and asset manager rating team. "Recent adjustments observed in rated MMFs include the removal of any residual Portuguese exposure and a significant reduction in exposure and tenure of Irish issuers throughout the summer. Investments in Italian and Spanish names remain focused on those with the strongest fundamental credit profiles, while Greece was removed from all funds in 2009."

Despite the consensus view that interest rates will remain on hold at least until Q3 2011, most European money market funds have not taken this opportunity to lengthen their yield curve positioning, due to the uncertain market environment and ongoing concerns over some European sovereigns.

"As a result, funds’ weighted-average maturities have been much lower than would be expected in such a stable rate environment," says Roxana Mahboubian, director in Fitch’s fund and asset manager rating team.

For the same reasons, managing a high level of liquidity has remained a strong focus with average overnight exposure reaching as much as 34 per cent of funds total assets in July.

The newsletter also reviews the benefits and drawbacks of money market funds portals, which have grown considerably over the past few years, and discusses the features of putable assets, notably putable certificate of deposits. While such instruments naturally appeal to money market funds, the actual put features vary from one structure to another, resulting in notable differing implications for investors in terms of liquidity, credit exposure and yield.

In Q2 2010, assets under management of the broader European money market funds universe experienced their fifth consecutive quarter of negative growth, reaching EUR1.24trn at end-June 2010. Despite positive net asset sales in August, AUM continued to further decline in Q3 2010, as indicated by asset trends in French money market funds and AAA-rated European CNAV funds, by far the two largest segments in the European money market funds universe.

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