As regulators on both sides of the Atlantic look at ways to make money market funds more robust, one option they’ve focused on is moving from a stable, or constant, net asset value (CNAV) model to a floating or variable (VNAV) model.
Unlike stable NAV funds, floating NAV funds do not maintain a share price of $1 (or 1 euro or £1). Instead, the price fluctuates in line with mark-to-market valuations. While some believe this type of fund is less susceptible to redemptions during a liquidity crisis, the floating NAV model is unpopular among many corporate treasurers. But some funds in Europe already use this model.
Colin Cookson, managing director of global liquidity at U.K.-based Aviva Investors, argues that treasurers’ concerns about a floating NAV are not justified. In 2008, following the collapse of Lehman, Aviva decided to convert all of its stable NAV funds to the floating model. “Since then we’ve added several billion of assets and new funds,” Cookson says. “I think the main issue for investors into VNAV funds is the fear of the unknown.”
Proponents of stable NAV funds argue, among other things, that the floating model means accounting complexities. But Jarno Timmerman, chief dealer at paint and coatings company AkzoNobel in the Netherlands, says the company has used a money fund with a floating NAV. “Although it was a VNAV fund, our systems were set up in a way that enabled us to account for it as though it were a CNAV fund,” he explains.
Floating NAV funds don’t necessarily experience price fluctuations. Since Aviva adopted the VNAV model, the valuation of its funds has never moved away from one, whether that’s £1 or 1 euro, Cookson says. And he argues that the possibility of variation is a strength, rather than a problem.
“If a CNAV fund breaks the buck, you have to freeze the fund, lock all the cash in, liquidate the assets and pay investors on a pro-rata basis,” Cookson points out. “With the VNAV model, investors know that the worst that can happen is a slight fall in the value of their investment.”
Aviva isn’t the first manager to offer floating NAV funds. Money funds in France use that model, and with more than $530 billion under management at the end of 2011, France’s money fund industry is larger than that of any other country aside from the U.S.