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Low yields in Europe continue to reduce money market fund investments

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Europe's continued low-yield environment is causing institutional investors to reduce their investments in money market funds (MMFs) and shift to higher-yielding investments, says Moody's Investors Service.

The report, "Euro Money Market Funds: Low Yields Result in Reduced Volumes and Riskier Investment Strategies", notes that the quest for yield has pushed fund managers and investors into riskier strategies and portfolios.
 
"With the euro area moving slowly back towards growth, MMF investors are showing less risk aversion and an increased yield appetite," says Marina Cremonese, a Moody's assistant vice president – analyst. "Fund performance, which became a secondary factor during the financial crisis, is now influencing investment decisions again."
 
European MMF assets dropped by 20 per cent to EUR912 billion in December 2013 from EUR1,141 billion in March 2011. Further, the volume of euro-denominated constant net asset value funds fell by 36 per cent to EUR75 billion during the same period. Moody's observes that bank deposits, segregated accounts and short-term bond funds have all benefited from this trend.
 
Moody's notes that the hunt for yield is also a rising trend in the French MMF sector, which is 100 per cent variable NAV market. Between January 2012 and December 2013, the volume of short-term French MMF assets declined by 44 per cent, while the volume of "long-term" French MMF assets increased by 42 per cent.
 
"Institutional investors are increasingly allocating their longer-term cash and investable balances to higher-yielding, less liquid products, rather than to yield-constrained MMFs. Excess corporate cash liquidity over the immediate cash needs is allowing investors to stratify their cash balances across a wider spectrum of liquidity products," adds Cremonese.
 
In addition, the low-yield environment has pushed fund managers to implement "barbell" portfolio strategies, which involve investing in longer-term securities to benefit from higher yields, while offsetting these with investments in shorter-dated assets.
 
"Such barbell strategies have led to increased pressure on rated MMF credit and stability profiles, increasing fund sensitivity," says Cremonese.

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