U.S. money funds trimmed Europe exposure-report

June 22 (Reuters) - Mutual fund investors and those who manage money market funds both showed last month that their confidence in euro zone banks has faded, according to two reports issued Friday.

U.S. money market funds reduced their exposure to euro zone banks as Europe's financial crisis worsened last month, Fitch Ratings analysts said in a monthly research note. A separate report from Cerulli Associates, meanwhile, found that concerns about euro zone banks fueled outflows from bank-sold mutual funds into bank deposit accounts.

The 10 largest U.S. prime money market funds, which collectively invest $638 billion, or nearly half of all prime funds, trimmed their euro zone bank exposure to 12 percent from 13.4 percent in April, Fitch said. The move reverses a steady increase of exposure by investors from less than 10 percent in December, as volatility in the region subsided. Prime funds invest in top-rate, short-term notes.

Money market funds, viewed as liquid, safe cash-equivalents, had invested around 30 percent of their assets in euro zone banks for most of a five-year period, from 2006 to February 2011, until volatility and investor anxiety began to rise, Fitch analyst Robert Grossman said.

"Exposures to euro zone banks are unlikely to return to mid- 2011 levels," Grossman said, citing investor "disengagement" that stems from worries about the health of euro zone banks.

Fund managers are redirecting assets to safer havens, including Australia, Canada and Japan, which together represent 30 percent of assets, while boosting exposure to U.S. Treasuries and agency debt to 21 percent - the highest levels since the nadir of the 2008 financial crisis.

Fitch notes that more money market fund managers are more often seeking what European exposure they have through repurchase agreements, or repos, which offer the safety of a strong counterparty and collateral. Repos as a percentage of euro zone bank exposure has surged to a record 32 percent, Grossman said.

These funds, which generally focus on short-term bank and corporate paper offering higher yields, also expressed their risk aversion by directing more assets to U.S. government securities. Fitch said 31 percent of money market assets for the 10 funds were direct Treasury holdings or else repos.

This investor anxiety has manifested itself as well in the euro zone's mutual fund business, where banks are directing customers to put their money into cash deposits rather than mutual funds, Cerulli said. Banks account for half the assets under distribution at Europe's mutual funds, which managed 5.3 trillion euros ($6.8 trillion) at the end of March

"The European fund industry needs to move swiftly and come up with a new strategic game plan for distribution," Cerulli's London-based analysts said.

In Spain, for example, 900 million euros flowed out of mutual funds this year, out of a total of 125 billion euros. The biggest declines were bank-owned fund managers such as BBVA , La Caixa and Bankia.