Twenty years after the money market fund rumbled into the United States, it appears ready to rumble again-this time into the United Kingdom.
The conservative cash-management tool has quietly gained momentum as bank debacles shook traditional British views about the security of demand deposits. Now, with all of Europe poised to move to a single currency, the euro, the conditions are ripe for the sector to take off, say industry experts in London.
"It's grown very fast and it's still very new," said Peter Knight, head of institutional cash funds for Fidelity Investment International. "The American way of money market funds is the wave of the future in Europe and the Far East."
And American companies are expected to lead the way in the United Kingdom, along with a handful of British companies, said Peter Collacott, managing director of Rothschild Asset Management.
In the more than 20 years since money market funds were developed in the United States, there was little activity in the United Kingdom. "Historically, banks in Europe have always felt that they can never go bust," Mr. Collacott said.
"There have been one or two knocks to that with Barings and BCCI, sometimes putting a question to these kinds of theories."
That has led investors to consider alternatives to bank deposits. And, in the United Kingdom there was no regulation Q, explained David J. Hynes, principal and head of cash management at Gartmore Investment Management, a unit of National Westminster Bank PLC.
Regulation Q, a Federal Reserve rule, prevented the payment of interest on demand deposits. It spurred the money market fund's growth in the United States. The difficulties in offering products across state lines supplemented the growth of these funds in the United States. None of these issues existed in the United Kingdom, he said.
With a heavy reliance on standard bank accounts, the U.K. marketplace did not develop the variety of financial instruments enjoyed in the United States. But that will change over the next five years as the U.K. becomes more like the United States, Mr. Collacott said.
In fact, U.S. multinational companies in the United Kingdom are partly responsible for the growth in money market funds. "They want to put spare cash into the things they are familiar with," Mr. Collacott said.
The money market funds that have been around do not feature daily net- asset-value pricing. Many newer money markets, particularly those based in Dublin and sold in the United Kingdom, look much like the U.S. version. They have net-asset-value pricing but are based in sterling, German marks, and other currencies. And Dublin funds are not taxed, nor is there any withholding on distributions.
Growth has been dramatic. In June 1995, there was just $2 billion in Dublin-based cash funds. That grew to $6.8 billion in 1996 and $9.1 billionin 1997, according to Fitzrovia, a London-based investment and research consulting firm. Indicating how growth will continue, Mr. Knight predicts that by the end of this year, $15 billion to $20 billion will be stashed in these funds.
These U.S. look-alike funds are introduced with the benefit of experience in the United States, Fidelity's Mr. Knight said.
"The emphasis is all about managing risk rather than chasing returns," Mr. Knight said. For instance, "derivatives in a money market fund are a no-no," he said.
Study after study has shown that British investors interested in money markets are less concerned about returns. But, with typical fees running from 15 basis points to as high as 25 basis points, the funds are a good deal for customers, he said. "It's one of the best-kept secrets around."
Europeans are unfamiliar with the product, but U.S. companies don't realize that these products are now becoming available in the United Kingdom, he said.
"All our competitors find exactly the same thing, they spend half their time doing seminars and the like," Mr. Knight said.
Institutional money markets should grow quickly as pension funds have a lot of cash available, Mr. Hynes said.
And banks will drive the retail growth, he said.
According to Mr. Collacott, the general rule in the United Kingdom is that regulations are stiffer for retail sales to protect the common man. Rules are less stringent for institutional uses, he said.
Who will be the big players?
"American competitors will lead the pack," said Mr. Collacott. He also expects Barclays Bank PLC, Lloyds, and Gartmore to be big players.
Gartmore is being very proactive, said Mr. Hynes. He explained that National Westminster is one of the first clearing banks to offer funds. He was hired more than two years ago from Goldman Sachs & Co. to spearhead Gartmore's efforts.
Fidelity and Aim Global Advisors have moved smartly to establish themselves in the marketplace and will be strong competitors, Mr. Hynes said. But, he added, they don't yet have the same name recognition in Europe as they have in the United States.
As these products develop, he does not expect much competition on fees or product features as they should all be very similar. Instead, distribution and access to clients will be the key to success. Insurance companies also have these relationships, he said. In that, he gives U.K. banks an edge as they have established customer relationships.
U.K. customers are more likely to keep their money with one company, he said.
Mr. Knight, however, points up that U.S. companies have deep experience with money markets. He said he went to the United States to spend time with Fidelity's money managers, and when he returned he had the benefit of that experience plus his own international outlook. "You bring the U.S. approach and you're merging it with the local flavor," he said.
Mr. Collacott agrees that experience helps U.S. money managers with U.K. operations. He said U.K. companies are at an "embryonic" stage developing this new product. And at the start, U.S. firms will be leading, he said.
And some U.K. banks, Mr. Hynes said, are slow to the race-loath to lead deposits to money market funds. But Gartmore is proactive in defending National Westminster's client base, he said.
Jockeying for position as the euro is introduced will be important. "Thetalk on the street is that the euro money market will be as big if not bigger than the U.S. domestic money market," Mr. Hynes explained.
"The opportunity to wheel and deal in money market instruments will be that much greater" with one currency, Mr. Collacott said. "It's our hunch that the world is going to change after the introduction of the euro."
How big will the money market be within the United Kingdom? Mr. Hynes said that if the U.S. market is at $1 trillion and the U.K. market has fully matured in five years, he expects it would be the equivalent of $600 to $700 billion dollars.
And despite the heady predictions about the potential for money market funds, Mr. Hynes sounds a note of caution.
"I think some people are becoming way too excited about it," Mr. Hynes said. He said the market would grow but there remain unknowns.
Once the euro is introduced, legislation that will regulate the industry may change rapidly. That, together with the lack of some issues like regulation Q that spurred the U.S. market, should discourage unbounded optimism. But it will be a very sizable market, he added.