The opposing school of thought goes as
follows: By its nature, the constant NAV
masks the fact that the value of the fund may
go up or down. With a VNAV fund, investors
understand that the value will fluctuate
and are less likely to make redemptions
during periods of market stress.
speaking at a seminar in 2010, Paul
Tucker, deputy governor for financial stability at the Bank of england, outlined some of
the objections relating to CNAV funds. “They
promise to return to savers, on demand, at
least as much as they invest. Just like a bank.
And just like a bank, they are subject to
runs,” he said. “And if a constant NAV fund’s
value goes just a few basis points below par
(100 pence in the £1), they effectively have
to close, fueling the incentive to run. If this
sounds like a bank, it is because it is just like
a bank.
“The Bank of england believes that con-
stant NAV money funds should not exist in
their current form,” Tucker continued. “They
should become either regulated banks or,
alternatively, variable NAV funds that do not
of assets in this type of fund means they are
valuable to the end investor.”
A number of money-fund experts say they
are far from convinced that moving to a VNAV
“If CNAV funds no longer existed, we wouldn’t
be interested in VNAV funds,” says Dmitry Be-
spalov, treasury manager at Netherlands-based
retail group Ahold. “When you have to fair-val-
ue everything on a daily or weekly basis, it’s like
you’re investing yourself. If CNAV funds disap-
peared, we would probably end up building our
own portfolio and directly participating in the
market ourselves. or we might use a segregated
mandate and set up a portfolio with one of the
asset managers.”
many argue that investors would not accept
the transition. “The one thing everyone wants
in the industry is to maintain a constant NAV,”
Gillespie says.
“If the industry moves away from CNAV
funds and VNAV funds become the only solu-
tion in the sector, it will kill the industry,” Be-
spalov says.
model will make the product more robust.
“some market observers believe that floating
NAV would have alleviated the issues around
money-market funds during the last market
crisis,” says Tony Wong, senior analyst and
head of short term investment grade and mu-
nicipal research at Invesco. “I believe that’s
debatable given the redemption experience
of ultra-short bond funds or French floating-
NAV money funds during that period.”
“some regulators have argued that inves-
tors in VNAV funds become ‘immunized’ to
price movements and so are less liable to
panic when markets become dislocated,”
Curry adds. “But we see no evidence in sup-
port of this argument. Indeed, investors in
enhanced VNAV funds redeemed en masse
in 2007. We can see no correlation between
redemptions and the particular pricing struc-
ture of a fund.”
so VNAV funds might not offer any real
advantage over their CNAV cousins—and
there is a big question mark over how inves-
The final chapter of regulatory reform
stemming from the financial crisis
has yet to be written.
—INVESCO’S WONG
offer instant liquidity.”
In light of these comments and the various
regulatory proposals, it is easy to see why there
is concern in the industry about the future of
the CNAV fund. But while regulators see VNAV
funds as a solution to some of the product’s
perceived shortcomings, not everyone agrees
that investors do not comprehend how CNAV
funds work.
“What we understand is that investors
want to be able to continue to invest in CNAV
funds,” says Jonathan Curry, a director at
ImmFA and chair of its technical committee.
“They understand the product. They understand the risks that are clearly described to
them. And I think the evidence of the volume
tors in a market worth more than $3 trillion
would react if regulators pulled the plug on
the CNAV model. As Gillespie points out,
investors who use CNAV funds do so because
they value the particular characteristics of
this type of money fund. other fund managers agree.
“most corporate treasuries prefer the trans-
actional benefits of a constant NAV,” Wong
says. “There are financial reporting, accounting
and tax implications with floating NAV money
market funds that could make these funds less
attractive. We’ve been hearing from our inves-
tors how critically important constant NAV is
to them.”
Consequently, there is no guarantee that in-
vestors would move from CNAV to VNAV funds
if regulators did away with the CNAV variety.
could change if the market moves to float-
ing NAV—in the u.s., at least, it would ma-
terially alter a product we’ve known since
the early 1970s.”
Regulators have yet to decide whether or
how to regulate the product further and it is
still possible that no further action will be
taken. “I think if the right people could get
in front of regulators, they could make them
understand the importance of money mar-
ket funds,” Gillespie says. “We’ve moved on
from a few years ago, added more rules and
regulations. We have enough controls in
place to meet any requirements.”
For now, the outcome is far from certain.
As Wong concludes, “The final chapter of
regulatory reform stemming from the finan-
cial crisis has yet to be written.”
