“Most U.S. or European fund complexes will find it difficult to maintain cash funds alongside everything else,” said Benjamin F. Phillips, partner at money manager consultant Casey, Quirk & Associates, Darien, Conn. “However, while many small cash fund owners will consider selling, only a few large consolidators will rank among active buyers.”
J. Christopher Donahue, president and CEO of Federated Investors Inc., Pittsburgh, said managers ranked below the top 25 are all potential candidates for consolidation. “You can be assured we're calling on all of them,” he said.
Federated added $14.1 billion of money market assets in 2010 from the acquisition of funds from RidgeWorth Capital Management, a subsidiary of SunTrust Bank. Federated managed $271 billion in cash strategies as of March 31.
DB Advisors has merged two competitor funds into its own this year. Last week, it completed the acquisition of more than $5 billion in money market funds from Standard Life Investments, bringing total cash assets under management to e85.3 billion ($124.9 billion).
Standard Life decided to get out of the constant net asset value portion of the cash management market because of anticipated changes to regulations in Europe and the U.S., according to spokesman Brian Simmons.
“We think that Treasury-style money market funds will fall into the scope of banking legislation in the future,” Mr. Simmons said. SLI will continue to run £3.5 billion ($5.7 billion) in cash strategies in which the value of investments may vary.
Henderson Global Investors also cited the regulatory environment as a reason it merged about £3 billion in its cash funds into those of DB Advisors in March.
In June 2010, the Securities and Exchange Commission implemented amendments to Rule 2a-7, which governs money market funds, to improve the stability and liquidity. Also in 2010, the European Securities and Markets Authority established the first pan-European definition for money market funds.
Experts believe the new definition will help increase the size of the liquidity market in Europe. Kathleen Hughes, managing director and global co-head of cash distribution for Goldman Sachs Asset Management, said the clarity given by ESMA will “help define how investors start to think about cash” and “help drive this business in Europe.” Ms. Hughes said GSAM is looking to expand its cash business, especially in Europe and Asia. GSAM ran $240 billion in cash strategies as of March 31.
In March, Amundi Asset Management announced a push into money market funds aimed at European corporate treasury cash. The manager expects an additional e30 billion of cash to be up for grabs in the next three to five years, said Laurent Bertiau, Paris-based deputy head of the institutional investment division in charge of marketing and development.
“Most of the large companies in Europe are still cash-rich, and the combination of quantitative easing and market uncertainty is working in favor of risk-free assets,” Mr. Bertiau said. Amundi is not looking to add assets by taking over assets of competitors. “We strongly believe that organic growth is the way to go,” he said. Amundi ran e120 billion in cash as of March 31.
But additional regulations are expected in the near future, some of which could make running money market funds more costly, experts say.
“There's no doubt there will be another phase of reform in the U.S.,” said the cash chief at one large firm, who asked not to be identified. The next phase could include forcing liquidity managers, as well as banks and insurers, to back funds with capital in both the U.S. and Europe. If regulations moved toward some required capital for cash managers, it “could be enough to get a larger manager to rethink” the cash business, the manager said.
In a quarterly sector update, Fitch Ratings noted that pending Basel III requirements for banks will likely “favor deposits over securities for short-term funding.” That would shrink the investible market for money market funds, which might also “suffer from the aggressive promotion of deposits for cash placement,” according to the report.
Said Mercer's Mr. Simpson: “We would not be surprised if a lot of smaller players have simply stopped offering these products or have white-labeled them with a bigger player, and this will have happened under the radar. Over time, we expect this trend to continue with only a handful of large committed players remaining in the market.”
With white-labeling, one manager keeps certain duties, such as client services, while another manager actually handles the assets. One example is Eagle Asset Management, which closed its $2 billion cash funds in the fourth quarter of 2010 and mapped assets from each fund into corresponding funds run by J.P. Morgan Asset Management.