Low volatility net asset value (LVNAV) money market funds (MMFs), a new fund category introduced as part of a new regulatory reform of the sector in Europe, will likely attract a large chunk of the almost EUR600 billion in assets currently held in prime constant net asset value (CNAV) funds, according to a new report from Moody’s.
Under the new regulation, prime CNAV MMFs will be phased out by January 2019.
LVNAV funds closely resemble the current CNAV model in risk and structure, but unlike CNAV funds allow the imposition of liquidity fees and redemption gates on investors under certain circumstances.
A survey of Moody’s-rated MMF managers shows that at this stage the industry expects LVNAV MMFs to attract most of the assets currently invested in prime CNAV MMFs, and the majority intends to offer LVNAV funds to their investors.
“While we also expect a significant proportion of CNAV assets to flow into LVNAV funds as the former wind down, some investors may be deterred by the LVNAV valuation process, as well as the potential implementation of fees and gates, which could restrict daily liquidity,” says Marina Cremonese (pictured), Vice President – Senior Analyst at Moody’s.
“In addition, LVNAV funds are likely to have lower yields than competing variable net asset value MMFs because of their stricter liquidity rules, which could further limit their appeal to some investors,” adds Vanessa Robert, Vice-President — Senior Credit Officer.
Moody’s expects that LVNAV funds will be managed more conservatively than prime CNAV MMFs. Portfolio Managers will likely opt for shorter durations and increase near-term liquidity as LVNAV funds could impose redemption fees and gates if liquidity thresholds are breached. Also, the narrow share price volatility tolerance for LVNAV funds will likely drive portfolio managers toward lower-risk investments.
The day-to-day task of running LVNAV funds will also be more complex with portfolio managers focused on liquidity management, sourcing short-dated assets, NAV calculations, and operational procedures around fees and gates.
