Following-Brexit vote aftermath, unscathed money market fund safe havens attract inflows

The shock waves following the EU referendum did not reach the money market fund (MMF) industry, as billions flowed into funds, Moody’s Investors Service said. However, the credit impact of the vote could shrink the investment universe for sterling MMFs, as they tend to invest in the highest-rated entities.

“Money market fund assets will rise in the coming months, particularly in sterling funds, as the industry acts as a safe haven. Investors are likely to postpone investment decisions and cash in hand is likely to be directed toward liquid and low-risk asset classes. Managers positioned their portfolios conservatively in anticipation of the referendum vote, mainly by shoring up their liquidity,” said Marina Cremonese, a Vice President at Moody’s.

“Yields of sterling MMFs will compress further if the Bank of England cuts rates. However, MMF assets would be resilient, given the lack of equally safe, cash-like investment alternatives. Even if yields were to fall further as expected by the market, for investors favouring daily liquidity, MMFs would remain a higher-yielding, more diversified vehicle than bank deposits,” added Vanessa Robert, a Senior Credit Officer at Moody’s.

In the week after the vote, with GBP1.7 billion flowed into sterling MMFs, EUR2 billion into euro MMFs and $24 billion into offshore US dollar MMFs. Moody’s said sterling and euro MMFs assets are set to increase in the coming months amid uncertainty. Lower investor confidence and higher risk aversion could cause corporate investments to be postponed, leading to inflows into low-risk, highly liquid assets such as MMFs. Flows in sterling and euro-denominated MMFs showed normal redemption/subscription patterns several days before and after the vote. Amid a pullback in short-term issuance by banks, MMFs have adjusted their asset composition to a shrinking pool of investment options in recent years. With regulators pushing banks to reduce short-term wholesale funding, MMFs have broadened their investment scope to other geographies outside the UK and EU. Rated Sterling MMFs’ largest exposure was to Australian and Japanese financial institutions (as of April 2016), while rated Euro MMFs were most exposed to US corporates and Swedish/Japanese banks. Moody’s said it expects this diversification trend by geography and sector to continue, especially as exposure to UK issuers could fall.

Moody’s says rated sterling MMF exposures to UK banks were short, with more than 40% maturing with seven days and more than half within 15 days as of 1 July 2016. Managers of Aaa-mf rated MMFs would maintain their barbell strategies — investing in longer-term securities to benefit from additional yield, while offsetting these with investments in short-dated securities.