Credit woes haven’t diminished money-market funds’ appetite for European bank debt.
The largest U.S. prime money-market mutual funds in recent months have boosted their exposure to European bank holdings like certificates of deposit and commercial paper, according to new figures set to be released Friday by Fitch Ratings. Such holdings now account for about 39% of the funds’ assets, up from 37.5% in the first half.
Investments in more troubled countries like Italy and Spain continue to play a significant role in money funds, though managers have lately pared back these holdings. Italian and Spanish bank debt accounts for 3.1% of the largest funds’ assets, according to Fitch, down from more than 6% a year ago. The funds now have no meaningful exposure to Irish and Portuguese bank debt, which accounted for 0.7% of assets late last year.
The Fitch analysis includes the 10 largest U.S. prime money-market funds, which hold about $740 billion, or 45% of prime fund assets. All told, money market funds now hold about $2.8 trillion.
Money funds have turned to European bank debt as regulatory and market changes have shrunk their pool of investment options. New U.S. Securities and Exchange Commission money-fund rules taking effect in recent months restrict lower-quality holdings and require funds to keep substantial assets in holdings readily converted to cash. And since the financial crisis, the supply of some money-fund holdings such as asset-backed commercial paper has contracted sharply.
“Funds are looking for opportunities to diversify,” says Viktoria Baklanova, senior director at Fitch.
Money funds can also find higher yields in some European holdings, a key consideration in a time of low interest rates. The average taxable money fund yields just 0.03%, according to research firm iMoneyNet.
But given the credit concerns swirling around Europe, a fund with hefty exposure to European financial institutions “might have some problems raising enough funds for redemptions” in times of market upheaval, says Lance Pan, director of investment research at institutional investment advisory firm Capital Advisors Group.
Looking at individual banks, money funds analyzed by Fitch now have the largest exposure to French banks BNP Paribas SA and Credit Agricole SA and Dutch bank Rabobank, which together account for about 9% of assets. The funds’ biggest bank names in late 2007 were U.S. institutions Citigroup Inc. and J.P. Morgan Chase & Co. and British bank Barclays PLC.
While France, Germany and the U.K. together account for the majority of money funds’ European bank holdings, many money funds also have substantial holdings issued by Spanish banks like Banco Bilbao Vizcaya Argentaria SA and Italian banks like Intesa Sanpaolo SpA. JPMorgan Prime Money Market fund, for example, had over 1% of assets in Intesa certificates of deposit and commercial paper as of Nov. 30, while Fidelity Cash Reserves held about 1.4% in Intesa commercial paper and about 0.7% in BBVA CDs.
“We are very comfortable with all of our funds’ holdings in foreign banks, and each of these investments has been determined to represent minimal credit risk,” says Fidelity spokesman Vin Loporchio. A J.P. Morgan spokeswoman declined to comment on the holdings.
Some money funds are feeling confident enough to move to longer maturities in European holdings. After shifting to shorter maturities earlier this year, Federated Investors Inc.’s money funds started extending maturities around the start of the fourth quarter, says Debbie Cunningham, Federated’s chief investment officer. It seemed that European countries “were dealing with their problems,” Ms. Cunningham says.
The latest flare-up of European debt concerns comes as money funds are complying with new disclosure requirements. Starting in October, money funds were required to provide monthly online disclosure of portfolio holdings. Some fund firms are seeking to reassure investors about European bank exposure particularly. Federated Investors Inc. disclosed on its website that its prime money funds had no bank holdings in Greece, Ireland, Italy or Portugal as of Nov. 30.
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By ELEANOR LAISE