With the advent of interest rate rises in the UK and US, money market funds (MMFs) have proved a popular investment during the past 18 months. Money markets was the only asset class to record net inflows in 2023, according to Morningstar UK fund flow data, as investors looked to take advantage of the higher yields on offer.
However, the sector suffered its largest outflow since June 2023 in February, as investors pulled a net £923m from cash funds. With central banks expected to begin reversing the rate hiking cycle at some point later in the year, what are the prospects for MMFs going forward?
Looking back over the past 18 months, Alastair Sewell, Aviva Investors liquidity investment strategist, says the combination of volatility pushing investors to lower-risk allocations coupled with the speed that interest rate hikes fed through to money market yields upped the attraction of cash-like products.
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“Despite its current attractions, the asset class appears under-utilised in the UK. While flows have certainly been positive in the UK in 2023, the total share of MMFs in overall fund asset remains low,” he says.
“Contrast this with the US where money market products are a mainstay of fund allocations and have received significant new assets. US MMF assets increased by over $1trn (£794.9bn) in 2023 – to around $6trn –with the retail share of that total rising to about 40% from 20%.”
Likewise, some investors have found money markets appealing in comparison to weakened sentiment toward equities since 2022, according to Interactive Brokers senior economist José Torres.
“During the past few years, investors have had modest expectations for equities, despite them outperforming strongly, with many analysts expecting stocks to generate returns ranging from 7-9%. This expectation has made the risk-free yield of money market strategies attractive relative to equities.
Read the rest of this article in the April issue of Portfolio Adviser magazine
