Negative yield threat prompts BlackRock to act on money market fund

By Simon Jessop and Emelia Sithole-Matarise

LONDON (Reuters) - Global fund manager BlackRock (BLK.N) said on Friday that it had told investors in one of its money market funds it would rebalance the fund daily in response to the threat of negative yields.

Returns from money market funds in Europe have been hit by weakening in trading conditions after the European Central Bank cut its deposit rate to minus 0.2 percent. Discouraging economic data and geopolitical risk made things worse.

That has left many investors worrying over whether they will get a return or lose money on a range of money market instruments, and if so how much, as the ECB action is felt in prices across the market.

"Negative is the new normal, and clients need to think about what that means for their cash management," said Bea Rodriguez, the head of cash portfolio management for Europe at BlackRock.

"Most people haven't had to think about cash," she said. "It's often the last thing they think about in their portfolio. But right now there is a cost to holding cash."

Some funds have closed to new money since the ECB first moved to a zero deposit rate in July 2012.

BlackRock is the latest firm to look to tweak its rulebook in order to keep a fund open. Others, with more focus on credit, have yet to feel the pinch.

It will do this by distributing income from the ICS Euro Government Liquidity Fund daily instead of monthly and, if the investments have returned a negative yield, cancel as many units in the fund as necessary to ensure the value of the remaining units remains steady.

"In the case of net negative portfolio yields, due to all securities that the fund can invest in trading negatively, maintaining a stable net asset value (NAV) would be impossible without having appropriate mechanisms in place or undergoing structural changes," BlackRock said in a statement.

Investors would still lose money in that situation, but they should lose less than they would by parking their cash at the bank, using alternatives such as the commercial paper or repo market or by leaving it with a custodian. All of those incur costs.

"Investors still value money market funds as a cash- management tool, and we want to make sure our clients can continue to access our funds during these challenging times," Rodriguez said.

Investors in the ICS Euro Government Liquidity Fund voted in 2013 to put a so-called Reverse Distribution Mechanism in place to allow the fund to continue to operate in a negative interest rate environment.

On Wednesday, BlackRock wrote to them to give 14 days notice of its intention to trigger the mechanism, although it stressed this did not imply the yield of the fund would turn negative as a result.

BlackRock currently manages around $268 billion equivalent in money market funds and cash portfolios around the globe, of which it has 23 billion euros (18.28 billion pounds) in three euro-denominated funds and roughly 35 billion pounds ($56.81 billion) in two sterling-denominated funds.

At the end of 2012, total assets under management held in money market funds in Europe was around 1 trillion euros, the Institutional Money Market Funds Association said on its website. The U.S. market was around $2.6 trillion.

When the ECB cut its deposit rate to zero in 2012, BlackRock and other big money market fund providers like JPMorgan (JPM.N) and Goldman Sachs (GS.N) temporarily restricted access to some of their funds to protect shareholders from yield dilution.

After the latest ECB measures, JPMorgan Asset Management said in a statement it did not expect its money market fund to turn negative in the near term.

"All of our euro money funds remained "open for business as normal. We will continue to monitor market conditions closely."

(Editing by Clare Hutchison, Larry King)