Lloyd Harris and Hoy Wan
Premier Miton Fixed Income fund managers
With the cash on deposit question becoming a frequent topic of conversation, fixed income managers, Lloyd Harris and Hoy Wan discuss the current attractions of money market funds.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
The dash for cash?
Investors have gravitated towards safer investment havens in the first few months of 2023. The turmoil in the banking sector in March and, more recently, evidence that a year of rising interest rates is starting to have a real impact on economic activity have increased the appeal of placing cash on deposit – but are there alternatives?
Cash rates today
Let us start by looking at what is on offer with cash on deposit and we will take a couple of National Savings & Investment (NS&I) products, probably best described as a ‘government savings bank,’ to give us an idea of rates available.
Easy access
At one end of the scale in terms of an easy access account, NS&I offer a direct saver account that pays a gross AER of 3.40%.
1 year lock up
Shifting along the spectrum of access to cash to a NS&I Guaranteed Growth Bond where a customer locks up their funds for 1 year, the headline gross interest rate is 5.00%.
The trade-off here is liquidity (access to invested cash) for return. The greater access to cash, the lower the headline rate of interest.
Is there an alternative to both these options?
Yes, Money market funds.
Money market funds exist as a place to put money with near instant access (trade date +1 day settlement), which means when you place a trade to sell the fund, the proceeds are received the next day. They aim to deliver returns above the bank Base Rate by investing in debt that have a maximum of one year to maturity, as well as putting money into short-term cash deposits, also with less than a year to maturity.
Investors use them to provide a high level of liquidity with a lower level of risk. A money market fund has traditionally been a low-risk investment that gives you a place to hold your savings, while aiming to give you a slightly higher return than cash.
Instead of investing in long-dated bonds or company shares, like many funds, Money Market funds invest in short-term debt. For example, our Premier Miton UK Money Market Fund buys short-term senior debt from governments, banks and companies with strong balance sheets and high credit ratings. It is designed to provide a high level of stability and access while also looking to deliver a cash like investment return.
To give this key point some real-life context
The Premier Miton UK Money Market Fund B income unit class yields 5.54% for both the distribution and underlying yield as at the end of July 2023. Past performance is not a reliable indicator of future returns.
Short-term debt is defined as the portion of a company’s or governments total debts that are due to be paid within the next 12 months.
When you think about cash on deposit with a bank, your savings will be subject to the given bank’s offered interest rate. Money Market Funds can offer the potential for greater investment diversification since invested money is spread across several different investments from banks, companies, and governments. Spreading risk and creating lots of sources of potential investment return.
What sort of return should I expect?
Money market funds may look to deliver a return over and above the Bank of England’s base rate or the Sterling Overnight Index Average (SONIA), a benchmark for short-term lending between financial institutions. After the recent rise in interest rates in the UK and elsewhere, this can, for the first time in many years, represent an attractive return for risk-averse investors.
Money Market funds can help simplify a client’s portfolio of investments
Money Market funds can be held in an ISA or SIPP. This means you can use them as part of an investment strategy for the long term, or park money in them if you are planning to invest it later but do not want to do so now.
They can offer an alternative to a cash ISA, and clients do not have to transfer funds between cash and stocks and shares products to use them.
Money market funds can also be a good place to hold your savings. For example, you may be unsure where you want to invest and need somewhere to park your cash while you decide. Due to the short time to repayment of the debt in the funds there is low volatility and price fluctuations.
Are these funds as safe as cash?
Money market funds are not as safe as cash. Although the time until the investments in the fund are redeemed is short and the assets as low-risk as possible, this is different from low-risk cash. You do not have Financial Services Compensation Scheme protection in the same way as you do for cash, where you are guaranteed all your money back up to £85,000 per institution if the bank fails.
Theoretically, in times of financial stress, money market funds could struggle to meet all investors’ demands if they wanted to take out all of their holding at once. However, there have been several reforms and regulations that have been introduced since 2008 which seeks to mandate that the funds hold high levels of liquidity to mitigate this risk.
Money Market funds did come under pressure in the early days of the coronavirus pandemic. None were suspended, so everyone could get their money out, and there is a requirement today for Money Market funds to maintain at least 7.5% of their total assets in daily liquid assets and at least 15% of their total assets in weekly liquid assets.
Why invest with Premier Miton?
The Premier Miton UK Money Market Fund aims to generate an income, paid four times a year as interest payments, by investing in an actively managed portfolio of investments. We focus on liquidity while making investment decisions based on:
- Security selection and credit worthiness
- The liquidity profile and maturity profile of the fund
- Broad exposure to financial institutions and other corporates, restricted to the fund managers’ approved issuer list which is also independently reviewed by our internal Risk team.
The recommended holding period for the Fund is up to one year. This does not mean that the Fund will achieve the objective throughout this, or any other, specific time period and there is a risk of loss to the original capital invested.
All holdings are kept under constant review in terms of their risk-return characteristics with the aim of keeping risks low.
