The European Securities and Markets Authority’s recent consultative report, in which it thinks of ending the dominant fund type in Europe, that of low-volatility net-asset-value money-market funds, while retaining variable net asset value (VNAV) funds, has increased investors' interest in short-term (ST) VNAVs, according to Fitch Ratings.

The ratings agency believes that ST VNAV money-market funds represented around 10% of money-market fund assets in Europe at the end of last year. It considers the portfolio risk profiles of rated ST VNAVs and low-volatility net-asset-value funds (LVNAVs) to be on the same level, despite the differing regulatory rules that pertain to them.

ST VNAVs have lower minimum regulatory liquidity requirements than LVNAVs. Rated ST VNAVs typically maintain considerably higher weekly liquid asset cushions than rated LVNAV funds. The minimum liquidity levels required in LVNAVs are higher than ST VNAVs, at 10% and 30% for daily and weekly maturing assets, respectively.

Outflows were most severe in US dollar-denominated money-market funds. The magnitude of outflows was higher in rated LVNAVs than ST VNAVs in the March 2020 market stress period.