Investors in Europe risk losing a haven as Goldman Sachs GroupInc., JPMorgan Chase & Co. and Morgan Stanley break a taboothat's stopped 88 billion euros ($113 billion) of money-marketfunds from ever losing principal.

The banks are preparing to abandon the policy that investors getone euro back for every one they put in as government bond yieldsnear record lows make it harder for the funds to generatereturns.

A money-market fund failing to repay investors in full is saidto “break the buck” and is forced to shut down. To avoid this,banks propose to change rules governing the investment vehicles sothey can pass on losses to investors by reducing the number ofshares outstanding in a fund, without closing.

“The jury is out on this,” said Bruce Campbell, head ofliquidity sales at Glasgow-based Ignis Asset Management, whichmanages about $25 billion of money funds and is weighing options tocope with negative yields. “Managers' decisions are being made tolook after the majority of clients, but they're not always going tosuit them all. Some clients are not happy with the cancelationmechanism.”

Banks and institutions such as BlackRock Inc. and Northern TrustCorp. are making the changes to so-called constant net-asset-valuefunds, which operate by maintaining a value of one euro per share.The changes will kick in when the European Central Bank cuts itsdeposit rate to below zero or yields on the safest government bondsturn negative for a prolonged period.

Benchmark German bond yields are close to record lows, with therate on Germany's two-year bond at minus 0.001 percent, up fromminus 0.023 on March 28, data compiled by Bloomberg show. France'stwo-year security is yielding 0.145 percent, up from a record-low0.03 percent in December.

Since the ECB cut the deposit rate to zero in July, money-marketfunds that are restricted to buying short-term debt generatedalmost no extra cash, putting pressure on their goal to provide asanctuary for investors. The seven-day yield on funds that buy eurogovernment securities was zero percent for the week ended March 22,according to research firm iMoneyNet Inc.

Prime funds, which take more risk and can also invest in bondsissued by the highest-rated banks and companies, made 0.02 percent.Since Jan. 4, euro money funds have seen assets under managementfall by 7.1 billion euros to 87.9 billion euros, Westborough,Massachusetts-based iMoneyNet data show.

JPMorgan Funds

JPMorgan, the largest U.S. bank by assets, said in October itwas replacing two constant NAV euro money-market funds, with about16.2 billion euros under management, with new structures which haveshares that can be canceled. All investors will have their holdingscut if total assets drop, an action that isn't allowed undercurrent fund rules.

JPMorgan is the second-biggest provider of money funds with $241billion in assets worldwide as of Feb. 28, according to Crane DataLLC in Westborough, Massachusetts. Sarah Godfrey, a spokeswoman forJPMorgan Asset Management in London, declined to comment.

Goldman Sachs Asset Management followed suit in December,changing the share class of three of its funds, with about $13.7billion under management in total, denominated in euros andyen.

“A very high flight to quality in Europe could cause yields tofall below zero,” said David Fishman, managing director and co-headof global liquidity management at Goldman Sachs in New York. “Ifthat happened on a persistent basis, you could see a situationwhere you would need to implement this. We've seen crisis-typesituations periodically, when short-term French and Germangovernment paper yield below zero, when there's a lot ofpanic.”

BlackRock, the world's biggest money manager, Morgan Stanley,Royal Bank of Scotland Group Plc and HSBC Holdings Plc are alsopreparing their constant NAV euro funds to pass on losses bycanceling investors' shares while keeping the net-asset value atone euro a share, Moody's Investors Service said in a March 13report. While the funds act like bank deposits in allowingcompanies, government authorities and pension funds quick access tocash rather than high returns, they can lose money.

Negative Yields

“We are now in a position where we can manage through potentialnegative yields,” Jonathan Curry, global chief investment officerof liquidity at HSBC Global Asset Management with more than $428billion under management, said in an e- mailed statement. Thechanges were put in place on Feb. 22, an HSBC spokesman said.

Stephen White, a London-based spokesman for BlackRock, declinedto comment. Tom Walton, a spokesman for Morgan Stanley and AoifeReynolds, a spokeswoman for RBS, also declined to comment.

The managers are trying to avoid the fate of the $62.5 billionReserve Primary Fund, which was the first fund in 14 years to breakthe buck when its net-asset value fell below $1 a share inSeptember 2008 because of its holdings of Lehman Brothers HoldingsInc. debt. Shareholders couldn't access their cash for months asthe New York-based fund was unwound and the collapse triggered arun on money-market funds that worsened the global financialcrisis.

While the changes may mean losses for investors, the funds wouldbe saved from having to close and will operate without the stigmaof breaking the buck. Still, clients may choose to redeem theirshares from the adjusted funds and invest in variable net- assetvalue vehicles that operate with a flexible price whileguaranteeing investors will keep all their shares.

Northern Trust, the third-largest U.S. independent custody bank,has prepared to change its 1.2 billion-euro constant NAV prime fundto variable, allowing investors to know how many shares they holdwhile the price can fluctuate, said David Blake, head ofinternational fixed income at the firm's asset management unit.Chicago-based Northern Trust's euro government fund has been closedto new subscriptions since the ECB's rate cut in July.

“The delivery mechanism for money-market funds in a negativerate environment would be unfit for purpose,” said Blake in a phoneinterview. “If the fund's overall yield falls below zero, then theconstant NAV structure won't work, it's broken.”

Variable Values

About 51 percent of European funds use variable asset values,according to the European Fund and Asset Management Association inBrussels. Europe's money market fund industry had 1.02 trillioneuros under management in December, according to EFAMA data ineuros, pounds and dollars.

Funds in the U.S. aren't adopting the changes even as theFederal Reserve has held its main rate at an all-time low 0.25percent since December 2008. Two-year U.S. Treasuries yield 0.24percent, up from 0.21 in July and compared with a record-low 0.15percent in September 2011, data compiled by Bloomberg show.

“We haven't seen these changes implemented anywhere outsideEurope,” said Yaron Ernst, managing director of the managedinvestments group at Moody's in Paris. “Yields moved lower inEurope after the ECB's decision in July. Since U.S. cash yields areslightly higher, the need for such change is not as critical.”

The changes are being adopted by more than half the euro fundsrepresented by the Institutional Money Market Funds Association inLondon, with almost 50 billion euros of assets, Fitch Ratingsreported Jan. 28. Half of the 68 European treasurers Fitch surveyedsaid the false perception their investment is guaranteed is adrawback of the funds and 35 percent said they disliked the lack oftransparency due to the accounting method, the rating firm reportedFeb. 26.

“Investors like the clear risk profile of constant NAV funds;that you get one euro in, one euro out,” said Alastair Sewell, ananalyst at Fitch in London. “Without that certainty, they mayconsider moving to deposits. Losing a lot of assets to bankdeposits would be a concern for the industry.”

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