Fitch: MMFs Extend Global Reach, Grow Nontraditional Holdings

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<0> Fitch: MMFs Extend Global Reach, Grow Nontraditional Holdings </0>

<0> Fitch RatingsViktoria Baklanova, Ph.D., CFA, +1-212-908-9162Senior DirectorFund and Asset ManagersFitch, Inc.One State Street PlazaNew York, NY 10004orBill Warlick, +1-312-368-3141Senior DirectorFitch WireFitch, Inc.70 W. MadisonChicago, IL 60602orMedia RelationsBrian Bertsch, New York, +1-212-908-0549 </0>

U.S. and European prime money market funds (MMFs) have continued to diversify their investments in 2012, slowly ramping up exposure to some highly rated emerging market banks. Fitch expects this trend to continue in 2013, as the supply of high-quality short-term assets in core markets remains constrained.

Although the share of MMF assets allocated to nontraditional issuers remains small (under 1% of total MMF prime assets), the trend toward greater global diversification is significant in signalling fund managers' desire to spread risk away from the highly concentrated group of traditional issuers in North America, Europe, Japan, and Australia. Still, growth in nontraditional geographies will likely occur gradually, with funds taking relatively small positions, primarily in Latin American and Asian banks.

We believe many fund managers likely view emerging markets in small doses as a reasonable investment alternative, at a time when historically low yields across all traditional short-term asset classes are depressing returns and forcing consideration of noncore investments. This highlights one of the key challenges facing MMFs moving into 2013 -- namely, how to achieve a workable balance between generating reasonable yield while managing headline risk affecting euro zone issuers and the risk from untested exposures in nontraditional markets.

We estimate that Fitch-rated U.S. MMFs had invested approximately $6 billion in advanced emerging economy banks (primarily in Chile, Korea, and Singapore) as of October 31. As an example, short-term investments by Fitch-rated U.S. MMFs in Chile's Banco del Estado de Chile (rated 'A+'/F1) grew from $75 million in mid-2011 to over $300 million at the end of October 2012.

Advanced emerging economy banks, often seeking to diversify dollar liquidity sources, also have benefited from better credit quality trends than their developed market counterparts. Emerging economy banks could see steady improvement in their dollar funding profiles in future years if MMF allocations to noncore markets continue to expand.

For a complete analysis of the credit outlook for global money market funds, see "2013 Outlook: Global Money Market Funds," dated December 12, 2012, at .

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at . All opinions expressed are those of Fitch Ratings.

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2013 Outlook: Global Money Market Funds

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