Expect Some European Money Market Funds To Disappear As Weak Returns Bite

Tom Burroughes

26 May 2017

European money market funds, battling with low fees, face a protracted struggle that may led to further closures, , the analytics firm, said in a report coinciding with moves by EU regulators to protect the sector.

Returns on such funds have been “abysmal” for years, and there will be casualties among providers, the Boston, US-headquartered firm said in a report.

"MMFs' anemic fee levels make the charges of passive funds look like rich pickings. But, unlike passive funds, MMFs have to be actively managed as short-term instruments mature and have to be replaced," Barbara Wall, Europe managing director at Cerulli, said.

As with passively-run funds, scale is crucial for profitability. "Those that do not have the scale are running at a loss in the hope that things will get better. Some have given up hope and the number of MMFs has declined."

The low-risk nature of MMFs means that institutional money has continued to pour in amid the political uncertainty. Flows into European funds in the first quarter of 2017, at €57 billion ($63 billion), are more than half the total for all of 2016. But with lower risk, comes lower reward. The European Central Bank cutting its deposit rate to -0.4% hammered the returns on MMFs. Providers have had to waive fees. For example, Aberdeen Asset Management's Euro liquidity fund is charging just 0.02 per cent for its annual management fee for the A share class, compared with the 0.50 per cent outlined in the prospectus, Cerulli said.

The recent rate hike by the US Fed has enabled some MMFs to lift fee waivers, but Cerulli said it is not positive about the outlook for such funds, citing regulatory costs as a headwind.

"Not many MMFs are likely to start generating major revenue anytime soon. Firms providing MMFs as some sort of loss-leader for other funds need to consider how long such a position is sustainable. The nature of the game has fundamentally changed and some players should refocus their efforts on other areas," Wall said.

This week, the European Securities and Markets Authority has published a consultation paper on how MMF should be regulated. The consultation runs until 7 August.

Among ESMA’s areas that it explores are the liquidity and credit quality requirements applicable to assets received as part of a reverse repurchase agreement; the development of a reporting template containing all the information managers of MMFs are required to send to the competent authority; guidelines about the outlines of stress tests that MMF managers must carry out.