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European MMFs reallocate 20 per cent by geography over past two years, says Fitch

Fitch Ratings says the European money market funds (MMFs) its rates have reallocated almost 20 per cent of their portfolios by geography over the past two years.

This represents an industry-wide geographic shift of around EUR100bn of assets.

The reallocation has been from peripheral Europe, the US and the UK, to core Europe, the Nordic countries and, to a lesser extent, Asian and Middle East issuers. Nevertheless, MMFs retain large exposures to European issuers, with the average portfolio 75 per cent exposed to Europe.

Fitch believes that further adoption of issuers from non-traditional geographies will be slow, driven by investment manager and investor preferences and volumes of issuance in the funds' base currency, rather than credit considerations.

Among Fitch-rated European MMFs, only 12 per cent invest in Middle Eastern issuers and 25 per cent in Asian ex-Japan issuers at end September 2012. Exposure to Asia Pacific issuers is a growing portion of MMF portfolios across all currencies; increasing seven per cent on average over the past two years.

Bank rating downgrades, sovereign concerns, and a lessened need for banks' short-term funding are leading investment managers to consider a wider universe of potential holdings. Some investment managers are more willing than others to invest outside of their traditional country range - a function of research resources and asset managers' caution, among other considerations.

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