US money market funds divided over exposure of French banks to Greek debt

The large exposure of French banks to Greek debt and other strained European economies has created a rare strategic rift among some of the largest US run money market funds that often move in step on their investments.

Fidelity Investments' $116 billion Fidelity Cash Reserves, the second largest money market fund, holds about 11% of its assets in securities issued by BNP Paribas, Credit Agricole and Societe Generale, and says not to worry.

‘This isn't a solvency issue, it's an earnings issue for the banks,’ said Robert Brown, president of Fidelity's money fund operations. He also rejected suggestions that Fidelity loaded up on the French banks' commercial paper to gain a slightly higher return than it could get from issuers with less Greek exposure.

David Glocke, who runs Vanguard Group’s Prime Money Market Fund, the third largest money fund with $110 billion in assets as of May 31, does not agree. Unlike many peer funds, the Vanguard fund he manages stopped rolling over maturing short term securities from the three French banks.

‘We sat back and said, Let's rethink this,’ he told Reuters. He decided the fund's conservative mission should outweigh the prospect of slightly higher returns. ‘From an investment perspective, we swim at the shallow end of the pool,’ he added.

About 18% of the Vanguard fund's portfolio is invested in European bank paper, but it is almost entirely issued by banks in Norway, Great Britain and other countries that do not use the Euro. The fund also holds repurchase agreements from the three French banks, which are better collateralized than their commercial paper, Glocke said.

JPMorgan Chase & Co's Prime Money Market Fund with $127.9 billion under management, is the biggest such fund, according to data from Lipper.

John Donohue, chief investment officer for the money market funds at JP Morgan, said in a statement that the bank has limited its French bank holdings to securities that mature within three months.

‘While JPM's conservative posture on credit and portfolio structure may lead to slightly lower yields across our money funds, the added benefit of safety and liquidity is more than worth it,’ he explained.

Disclosures through to May 31 show Fidelity Cash Reserves holding $5.7 billion in BNP securities, $4.1 billion from Credit Agricole and $2.9 billion from Societe Generale. Together they make up about 11% of the portfolio, according to Lipper.

The money funds' exposure to French banks has gotten much attention since last month when Moody's Investors Service said it would review the three banks for a possible downgrade over their exposure to Greece. The vulnerability of French banks comes at an inopportune time for money-market funds, which have been battling low rates for more than two years with no near-term prospect of relief.

The three largest funds have returned around 2.18% over the past five years, 0.5% over the past three years and a mere 8 basis points for this year as of June 24, according to Lipper.

In order to assuage investors, sponsors of many money market funds have been waiving fees, less the investments result in negative returns. Fidelity has cut fees on many of its US Treasury money market funds and recently began waiving the fee on its Cash Reserves fund, Brown said. Vanguard has also waived some fees, a spokesman said.

Brown emphasized that Fidelity is not putting investors at risk by holding on to French bank paper. As a result of strategic and regulatory changes since the 2008 liquidity crisis, it has shortened the maturities it holds, with about half of its assets in securities that can be cashed within seven days.

Also, Brown said a team of Fidelity specialists including cash reserves portfolio manager Robert Litterst flew to Paris in March for look at the French banks. ‘We have gone through each of the banks and stress-tested them,’ Brown said.