Fitch: Credit, Liquidity Profile Diversity Heightens Among European VNAV Money Funds
There is pronounced diversity in the credit risk borne by European VNAV money funds, and this has widened over the past year, according to Fitch's latest study on a sample of representative European money funds. Behind an average portfolio allocation to 'BBB'/'BBB-' or unrated securities of 14%, there is material allocation disparity among VNAV money funds, ranging from 0% to 47%. This is in contrast to a year ago, when money funds had only marginal exposure to 'BBB'/'F3' or lower assets.
The most conservative VNAV money funds (37% of funds) limit their investment to high quality issuers, with a minimum credit quality of 'A'/'F1' or equivalent, similar to the investment guidelines of constant NAV (CNAV) funds, including 'AAAmmf' rated funds or alike. The remainders tend to invest in a wider universe of issuers and counterparties, reflecting the fact that they offer differing return and safety objectives. These include lower credit quality issuers, typically among non-financial corporates, which provide some sector diversification compared with the financial issuers they otherwise largely hold. It is also adding credit, market and liquidity risks allowing funds to earn some incremental yield. Such funds may appeal to investors as a complement to more conservative money funds, especially in the current ultra-low euro yield environment.
Fitch estimates that about half of short-term VNAV funds invest only in securities rated in the 'A' category or higher (F1 or F1+ equivalent). The other half has some degree of exposure to lower-rated or unrated assets, mostly with a minimum credit quality of 'BBB'/'BBB-' (F3 equivalent). Among standard MMFs, the second ESMA-defined money fund category, more than 70% invest in assets rated below 'A-' and close to 40% have a minimum credit quality of 'BBB'/'BBB-'.
Portfolios' average maturities span the full spectrum offered under the ESMA framework, highlighting notable spread risk disparity. This is to be assessed in the context of assets' credit quality as issuers of lower credit quality tend to be more sensitive to spread volatility and are typically less liquid. Such risks are nonetheless contained by regulation, given the 397 days asset maturity limit (or two years for floating rate notes in standard MMFs).
European VNAV funds, of which 65% are domiciled in France, comprises funds classified in the two money fund categories defined by ESMA, short-term MMFs and standard MMFs, primarily denominated in euro. Constant NAV (CNAV) funds in contrast are all short-term MMFs and include sterling, US dollar and euro funds.