By Peter Dalgliesh, managing director at Parmenion Investment Management
One clear beneficiary of the acceleration in base rates over the last 18 months is the money market universe. With current yields above 5%, there has been marked rise in interest (pardon the pun) in the asset class, with net inflows in excess of £1.3bn for the second quarter of 2023. Only fixed income saw larger net inflows, while equities are in outflow.
So, why the fuss?
Money market funds are used for a wide range of reasons, so speculating on what has driven flows risks ignoring the nuance of financial planning. However, there have been a couple of very favourable tailwinds.
Confidence is at the heart of investors’ ability to take on risk. 2022 was a painful reminder that markets go down as well as up. As we progress through 2023, it continues to be challenging for investors to advocate risky investments (especially for new money, given recent volatility). This is particularly true for lower risk investors, who experienced greater losses than in any other year in recent history.
Yields also play an important part in the opportunity cost of investing today. With 5% available, the hurdle to take on investment risk has become much higher. While we are advocates of long-term investing and very aware of the capital erosion inflicted by inflation, the short-term appeal of the money market is clear. It’s worth remembering though, that with UK CPI at 6.7%, this is still a negative real yield of almost 2% before costs.
The importance of fund due diligence
Money market funds have their own nuances so oversight and due diligence is as important as any other asset class.
It is critical to understand the regulatory framework and risk parameters that different funds are subject to. Many investors will remember how some money market funds suffered drawdowns during 2008-2009. The limits on risk that different types of money market fund are allowed to take is now a world away from what in the past were effectively short-duration bond funds.
There are three main money market fund types – CNAV, LV NAV and VNAV. LV Nav funds offer one of the strictest sets of portfolio controls. These include requirements such as a minimum of 10% in overnight securities, a minimum of 30% in securities that mature within a week, plus a maximum weighted average life of no more than 60 days. In addition, the funds must be AAA credit rated by Fitch. This offers a confidence in the security and liquidity of the assets invested.
Uncertainty driving flows
In today’s environment where uncertainty and a lack of confidence might be driving flows into more cash-like products, having an on-platform solution offers control and speed of execution that can be a real advantage to investors.
Risk and uncertainty won’t remain forever, nor will the relative attractiveness of money market funds. The long-term inflationary environment will chip away at the purchasing power of assets in cash or money market funds. Beyond specific financial planning needs, money market funds are not a credible long-term home for most investors’ capital.
On-platform money market funds do however offer investors control and access to implement new investment approaches as and when the time arises. The speed and simplicity of making that change when the time is right is a huge benefit to the overall investment management service that advisers can offer those investors who are not quite ready to invest into riskier assets today – but might need to in the future.
