Fitch: Money market fund soft closures could continue
Fitch Ratings has warned that the European Central Bank’s decision to cut interest rates on its deposit facility could result in a number of european money market funds closing to new investments.
The move could also prompt some providers to cut fees in attempt to keep returns positive, the ratings agency reports.
“While these actions will help protect existing investors from potential negative yields, we believe the high cost investors pay for liquidity in the current environment could increase the demand for products that have a longer investment horizon,” it warns.
“Some funds may opt for more flexible investment strategies to meet these demands and avoid negative yields.”
A number of funds could be subject to rating downgrades if they are not able to withstand liquidity shocks.
Providers including Insight, Northern Trust, RBS Asset Managmenet and Legal & General Investment Management have closed to new investment following news of the rate cut.
“In this environment, the decision by some funds to temporarily close to new investments is a prudent one to protect existing investors and will not have any direct impact on ratings,” Fitch reports. “We expect to see a pattern of temporary soft closures continue across the sector. These tend to last until the current portfolio has matured and is reinvested at prevailing rates, at which point new investments no longer pose a risk of dilution for existing investors.”
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