Three big U.S. asset managers have restricted investor access to European money market funds in the wake of the European Central Bank's interest rate cut.
The restrictions came at several of the largest fund operators and show how large institutional investors have few good options left to earn interest on their cash, specialists said.
JPMorgan Chase & Co , BlackRock Inc , which is the world's largest money manager, and Goldman Sachs Group Inc on Friday all confirmed the restrictions.
JPMorgan spokeswoman Kristen Chambers said the New York bank's investment arm temporary closed funds to new investors after the ECB's rate cut on Thursday, "because we think it will help prevent further dilution in yields, which is in the best interest of clients."
A notice to investors shows JPMorgan has limited investments into five funds from new and existing investors, though shareholders can continue to move assets out of the vehicles.
BlackRock has also limited access to a pair of European money funds, a spokeswoman said.
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A Goldman Sachs official in London confirmed reports that the firm is not accepting new money in its GS Euro Government Liquid Reserves Fund because it cannot invest at the new rates without substantially diluting the yield for existing shareholders.
Searching for yeild after rate cuts
The limits show how institutional customers who buy the funds face few good options after the European Central Bank on Thursday cut its main refinancing rate to a record low of 0.75 percent. The move followed a dire batch of data that showed even Germany, the euro zone's economic powerhouse, entering a modest downturn. The lower rate could send investors looking for new places to put cash to work, such as money funds.
But money fund managers are hardly looking for more cash from investors, as the fund restrictions showed. U.S. fund operators have been squeezed by low interest rates and have slashed fees just to keep clients invested in the cash-management vehicles.
"It's absolutely more difficult to find places to park money," said Greg Zandlo, an adviser with Minneapolis-based North East Asset Management, Inc, which has $75 million in assets under advisement.
Given that money markets have been earning close to zero over the past couple of years, advisers like Zandlo have been turning to alternatives for some time now. Zandlo said he has been relying on certificates of deposit and state-specific municipal bond funds as a proxy to money market funds.
"They provide less liquidity but it amps up the return in lieu of holding cash," he said.
Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama, made a similar point, that investors have few choices. "In terms of yield, there's really nothing there that's attractive," he said. Many funds operate only "as a parking spot for cash," he said.
Operators of equity mutual funds often close the vehicles to new investors when managers have difficulties finding new places to invest cash. Peter Crane, publisher of the cranedata.com website, said money funds have also been temporarily closed in response to low interest rates, such as in 2009 and 2010 at several U.S. Treasury money funds.
Technically, U.S. investors cannot buy the restricted funds. But they are available to multi-nationals including European subsidiaries of U.S. corporations, Crane said.
Crane said he did not expect U.S.-focused funds to follow the European ones, since the former have more room to absorb new cash without reducing yield for current investors.
While the U.S. money funds contain a variety of commercial paper and other short-term debt from corporations, the European money funds mainly hold instruments tied to banks on the continent, he said. European money fund customers will likely see yields decline as the ECB rate cut works its way through the banking system. That could ease demand from outsiders to move money into the funds and lead to an easing of the restrictions.
Crane said he tracks about $108 billion in the European funds. JPMorgan funds account for the largest share of that, $23 billion, followed by $18 billion in BlackRock funds.
Other large U.S. fund firms, including Fidelity Investments and Vanguard Group Inc, do not offer European money funds, spokespeople said.
Welcome problem for funds
In a way, the European fund restrictions mark a welcome problem for the money funds: too much investor demand. In Washington, U.S. regulators are mulling changes for the funds out of concerns they could face the opposite problem: big institutional investors rushing to pull money out of the funds.
Investors have rushed for the exits before, pressuring dozens of fund companies to provide support to help the funds maintain the $1 per share net asset value that investors have come to expect.
But industry executives argue rule changes in 2010 have made the funds more resilient. Investors have steadily maintained around $2.5 trillion in U.S money funds since last year, something that analysts say partly reflects a lack of alternatives.
Rare demand
The restrictions that followed the ECB move reflect a demand for the funds that would mark a turnaround. European money market funds posted outflows of $15.4 billion between June 28 and July 4, fund-tracking firm EPFR Global said on Friday. Those are the highest outflows from the funds on a record that extends back to the first quarter of 2007, Cameron Brandt, EPFR Global's director of research, said.
But the ECB rate cut is nothing for the funds to celebrate, said John Stoltzfus, chief market strategist at Oppenheimer and Co.
"Rates are so low that it's not practical to offer these funds to new investors," said Stoltzfus."The difference of covering the cost of running the fund and paying a relatively attractive yield to the shareholders- there's not enough left over," he said.