JPMorgan Chase & Co. (JPM:US), squeezed along with other money-market fund providers by low interest rates, has become the first to prepare investors for negative yields from funds that maintain a constant net-asset value.
Constant NAV share classes of the 3.84 billion euro ($5 billion) JPMorgan Euro Government Liquidity Fund (JPMEGAA) and the 13.5 billion euro Euro Liquidity Fund (JPMEULC) will be replaced next month with new share classes that allow the funds to maintain their stable value by taking shares from investors, causing them to lose money, the New York-based bank said yesterday in a statement. The firm is giving customers until Nov. 18 to switch to the new share class, to a floating-value share class or redeem shares.
“It’s not that we think negative yields are imminent, but we want to be prepared,” Robert Deutsch, JPMorgan’s head of global liquidity, said today in a telephone interview. He said some institutional investors, to which the funds cater, have signaled they would still use the fund if yields turn negative.
Euro-denominated money funds have been extending the maturity of holdings, broadening their assets, waiving fees and turning away clients to prevent record low interest rates from pushing investor returns below zero. Rate cuts prompted JPMorgan, BlackRock Inc. (BLK:US) and Goldman Sachs Group Inc. (GS:US) to close or restrict deposits to euro money funds. The European Central Bank cut its deposit rate to zero on July 5, pushing down yields on the short-term debt to which money funds are restricted.
“Small funds are likely to liquidate should yields turn negative while large ones will try to accommodate their investors, and this looks like the most promising avenue for that,” Peter Crane, president of research firm Crane Data LLC in Westborough, Massachusetts, said in an interview, referring to the JPMorgan announcement.
The average seven-day yield on funds that buy euro- denominated government securities was at zero percent for the week ended Oct. 12, according to research firm iMoneyNet, also based in Westborough, Massachusetts. The average yield on euro funds eligible to purchase corporate debt was 0.05 percent.
No constant NAV cash product has ever returned a negative yield to investors, according to JPMorgan’s Deutsch.
The share prices of funds with floating values would decline if investment returns fail to exceed fees fund managers impose on clients. The same scenario would cause a constant NAV product to “break the buck,” as it’s known in the U.S., where money-fund share prices are kept at $1.
The $62.5 billion Reserve Primary Fund was forced to shut down in September 2008 after losses on debt issued by Lehman Brothers Holdings Inc. caused the fund to fall below $1 a share. That triggered a run on the industry and efforts by regulators to overhaul fund rules in the U.S.
To avoid breaking the buck, JPMorgan is rewriting the prospectuses of the two Luxembourg-registered funds and adding share classes that allow the funds to reverse the normal process by which constant NAV investors receive returns.
Those funds typically maintain a steady share value by distributing new shares as investment earnings cause total assets to rise. The JPMorgan funds would automatically reduce the number of shares by taking some away from all investors if total assets drop, an action that isn’t allowed under current fund rules.
“At the time you redeem, you may get back less than you originally invested,” the company said in the statement.
JPMorgan was the second-biggest provider of money funds with $372 billion in assets worldwide as of Sept. 30, according to Crane Data. Fidelity was the largest with $422 billion.
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