In times of financial panic, nervous investors in variable net asset value (VNAV) funds are just as likely to race to cash as constant net asset value (CNAV) fund investors, says Moody’s Investors Service in a report published today.
New global money market fund (MMF) regulations aim to expand the use of VNAV structures, citing that their price transparency reduces the likelihood of run risk in a crisis. Since investors in VNAV funds are
used to fluctuations in net asset value, they may be less likely to suddenly remove money.
However, Moody’s observes that price transparency could diminish for both CNAV and VNAV funds in times of high uncertainty. Funds with either structure face similar difficulties in valuing assets when the market is extremely illiquid.
“The assumption that VNAV money funds are less prone to run risk is somewhat contradicted by the experience of French money funds which saw a considerable drop in assets in 2007 and 2008. The impact of the sub-prime crisis was, by far, more pronounced on French VNAV money funds than on US
money funds which were CNAVs”, says Vanessa Robert, a Moody’s Senior
Credit Officer and author of the report.
“We believe that in times of crisis, redemptions will occur regardless of a fund’s structure. Following the bankruptcy of Lehman Brothers in September 2008, for example, both French and US MMFs suffered declines in AUM, but both subsequently reversed these declines”, Ms Robert added.
Under the Securities and Exchange Commission’s amendments to rules governing US MMFs effective in October 2016, institutional prime and municipal MMFs will shift from a uniformly CNAV structure to a VNAV structure.
Once the new regulation takes effect, Moody’s expects the breakdown between CNAV and VNAV funds in the US to be two-thirds (retail MMFs and government funds), one-third (institutional prime and
institutional municipal MMFs), respectively.
Similar proposals are under consideration in Europe, where the European Parliament proposed a gradual shift to VNAV structures for some European CNAV MMFs. The MMF sector in Europe is currently approximately 60% CNAV funds and 40% VNAV funds.
African Eye News.com
