By Juliet Chung And Kirsten Grind
Some of the world's biggest money managers are making sweeping
changes to their European money-market funds amid expectations of
losses for the normally staid investments.
The moves by BlackRock Inc. and Northern Trust Corp. stem from
the European Central Bank's decision in September to cut interest
rates into negative territory. The rate cut threatened the
profitability of the EUR93 billion industry of euro-denominated
money funds, which are used by large corporations and institutional
investors as a place to park cash while earning a small amount of
interest.
Already, several euro money funds have starting losing money and
executives say they are bracing for the entire universe of euro
funds to start doing so as soon as January as managers invest more
of their portfolios at negative rates. The fund executives say that
if they don't make any changes, they will be in the unusual
position of paying to manage client money, an unsustainable
situation that would result in the closing of euro money funds.
As a result, leading money managers including New York-based
BlackRock are changing how they charge fees. Others, like State
Street Global Advisors, have told clients they may start using
similar strategies.
"You can presume every euro money market fund out there already
has something in place to deal with this scenario, or they've given
the money back already," said Pete Crane, president of Crane Data
LLC, a mutual-fund research firm.
The shift complicates options for money-fund clients, who
already are struggling with where to put cash denominated in euros
as some banks now are charging to hold such deposits on the back of
the September rate cuts.
This is the first time that a major market for institutional
money funds--considered to be the dollar, the sterling and the
euro--has experienced this sort of widespread rate challenge,
money-fund managers said.
In addition to the rate cuts, banking regulations like Basel III
have pushed down money funds' returns, managers say, by decreasing
the amount banks are willing to pay for short-term investments some
money funds make at banks.
"We get our customers asking, 'What am I missing here? What can
I do?'" said Jason Straker, a portfolio manager for euro
money-market funds for J.P. Morgan. With short-term investments
costing clients or yielding little, he said, "if you can have a
slightly longer investment horizon, now is the time to put that to
good use."
Institutional investors are expressing more interest in having
customized accounts that can invest in higher-yielding securities,
Mr. Straker said. Money-market funds are required by regulators and
ratings firms to keep a substantial portion of their fund in
short-term investments.
Fund managers draw a distinction between negative yields
stemming from rate cuts and losses that occur because the
instruments they invested in have declined in value--a taboo
prospect referred to in the industry as "breaking the buck."
BlackRock alerted its clients last month that it would begin
distributing income from its prime euro money funds, which invest
in securities including bank debt and commercial paper, daily
instead of monthly, said Bea Rodriguez, the head of BlackRock's
cash portfolio management in Europe. BlackRock is the largest
provider of euro money funds, with EUR22.6 billion in assets under
management.
State Street Global Advisors told clients of its EUR Liquidity
Fund in mid-September it could start using a similar mechanism that
would let the fund reduce the number of shares its investors hold
to keep a constant net asset value--a bedrock feature of money
funds.
Northern Trust in August closed a euro fund with a constant net
asset value and opened a new euro money fund, the Euro Liquidity
Fund, with a variable net asset value. "We have now seen the
reinvestment rate turn negative and we expect this rate to
persist," Northern Trust said in a memo to clients explaining why
it made the change. Clients of the existing fund could redeem from
that fund before it closed, or switch over to the new fund.
J.P. Morgan Chase & Co. implemented changes giving it
options similar to BlackRock's two years ago following earlier
interest rate cuts by the ECB, but hasn't begun using them. In a
Nov. 14 client note, the bank said that in the current rate
environment, it expected gross yields on its money funds "will at
some point turn negative."
Companies might not see a giant exodus, even if all funds begin
yielding negatively, because of the lack of other appealing
options. Fund managers say euro funds generally cost investors less
money than they would lose by keeping their cash at banks.
Indeed, industrywide, assets in euro funds have fluctuated on a
daily basis, but assets under management have increased EUR6.8
billion since the end of August through mid-December, according to
Crane Data.
"The view is, this is their best alternative," says Dave
Fishman, co-head of Goldman Sachs' global liquidity business.
Write to Juliet Chung at juliet.chung@wsj.com and Kirsten Grind
at kirsten.grind@wsj.com
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