Money market funds' conservative positioning means credit quality and portfolio stability will remain resilient in 2013, despite ongoing credit and macroeconomic pressures, says Moody's Investors Service in its industry outlook.
"For 2013, we expect the credit environment to remain challenging in light of the continued negative pressures on sovereigns and banks," said Henry Shilling, a Moody's senior vice president and co-author of the report. "While some negative economic scenarios, especially with respect to the eurozone and U.S. budget negotiations, may result in additional money market fund stress, active portfolio management is a key mitigating factor in our money market fund analysis."
Moody's notes that upcoming challenges for money market funds and their management firms include the limited supply of highly-rated short-term investments, sustained low interest rates, and pending regulatory reform.
"Regulatory reform is a key issue for the industry," says Vanessa Robert, a Moody's vice president -- senior credit officer and co-author of the report, "Money Market Funds: 2013 Outlook and 2012 Review." A low-to-negative yield environment has already led to some alteration of European fund structures, while regulatory reforms in the U.S. as well as Europe are likely to impose more extensive structural changes. "These changes could result in fundamental changes to the industry, including limits on constant net asset value money market funds, lower assets under management, lower management fees, as well as a reordering of investor preferences between fund types," adds Robert.
Taking these factors into account Moody's expects that large fund managers with diversified product offerings will be better able to adapt to the evolving industry landscape. In addition, alternative liquidity management product offerings, such as ultra short to short duration funds, segregated accounts and ETFs could introduce opportunities for asset gathering and new sources of revenues for select asset managers.