JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. and BlackRock Inc. (BLK) closed European money market funds to new investments after the European Central Bank lowered deposit rates to zero.
JPMorgan, the world's biggest provider of money-market funds, won't accept new cash in five euro-denominated money- market and liquidity funds because the rate cut may result in losses for investors, the company said in a notice to shareholders. Goldman Sachs won't accept new money in its GS Euro Government Liquid Reserves Fund, and BlackRock, the world's largest asset manager, is restricting deposits in two European funds.
"The European market environment is in unchartered territory with such historically low -- or even negative -- yields for high-quality issuance," Goldman Sachs (GS) said in a memo to fund shareholders, citing the ECB's rate cut. "It is not currently feasible for our portfolio managers to deploy capital without substantially diluting the yield for the existing base of shareholders."
The ECB yesterday reduced its benchmark rate to a record low of 0.75 percent and took its deposit rate to zero. Money funds have been struggling to invest client assets at a profit as interest rates globally are near record lows and Europe's sovereign debt crisis has reduced the supply of available debt. Managers have been forced to cut fees to keep customer returns above zero, and some have abandoned the business.
All three firms said the restrictions are temporary and they will monitor market conditions. Investor redemptions from the funds are not being limited.
JPMorgan's five closed funds had 23.7 billion euros ($29.2 billion) in assets as of July 5, the bank said in an e-mail, about 22 percent of all euro-denominated money funds. The funds are JPMorgan's Euro Liquidity Fund (JPMEULC), Euro Government Liquidity Fund, Euro Money Market Fund, Euro Liquid Market Fund and JPMorgan Series II Funds -- EUR.
The deposit rate cut "will almost certainly move cash bids in short-dated instruments into negative territory, and so we have taken the step to restrict subscriptions and switches into the funds in order to protect existing shareholders from yield dilution," JPMorgan said on its website.
The company had $417 billion in money fund assets as of May 31, making it the world leader, according to Crane Data LLC, a research firm based in Westborough, Massachusetts. The entire euro-denominated money fund industry has about 108 billion euros, Crane Data's statistics show.
No other global liquidity funds are at risk of being closed, "but we will not hesitate to restrict investments if we feel the market environment warrants such action in order to protect the interests of existing shareholders," JPMorgan said on its website.
BlackRock is restricting subscriptions into two funds in its Institutional Cash Series, the Institutional Euro Liquidity Fund and the Institutional Euro Government Liquidity Fund, Jessica Greaney, a spokeswoman for the firm, said in an e-mail.
"We're continuing to monitor the situation and evaluate options that are consistent with the best interest of fund shareholders," Greaney said.
Vanguard Group Inc., the world's largest mutual-fund firm, closed two money funds in 2009 and the funds have remained closed, spokesman John Woerth said in an e-mail. The two funds, Vanguard Admiral Treasury Money Market Fund and the Vanguard Federal Money Market Fund, have about $18 billion in assets, according to data compiled by Bloomberg.
The Valley Forge, Pennsylvania-based firm said at the time of the closing that the action was taken to protect existing shareholders. Vanguard has $1.8 trillion in U.S. mutual fund assets.
Fidelity Investments, based in Boston, restricted investments in four of its money market funds in December 2008. The funds were reopened in July 2010, spokesman Adam Banker said in an e-mail.
"We took those measures because we believed they were in the interests of the funds' shareholders at the time," Banker wrote. Boston-based Fidelity had $403 billion in money fund assets of May 31, according to Crane Data.
The $2.5 trillion U.S. money fund industry has been wrestling with the impact of low interest rates since the Federal Reserve cut rates to near zero in December 2008.
Industrywide revenue fell from about $12.5 billion in 2008 to $4.7 billion in 2012, according to Crane Data. Yields that reached 5 percent in 2007 today average about 0.06 percent, President Peter Crane, said in a telephone interview.
"Investors have lost hundreds of billions of dollars of interest income," Crane said. While industry profits have been squeezed, very few major players have left the business, Crane said.