Finding a safe home for our idle cash

With nearly all fund sectors posting losses, Saltydog Investor is investing in money market funds.

When we first launched our demonstration portfolios, we would, from time to time, invest in the ‘Money Market’ funds sector. These funds were never going to make us rich, but we could earn more than just holding cash in our trading account. It was a useful place to be able to go to when markets were falling, and we were looking for something relatively safe where we could shelter until the next buying opportunities presented themselves.

For the last few years, we have not really considered them. Interest rates have been so low that it would have been hard to cover the costs of holding the fund and any transaction costs, but with interest rates going up, we thought they might be worth looking at again.

They invest in short-term debt instruments, cash, and cash equivalents. Although they are not quite as safe as cash, because there is always the risk that the bank or government issuing the debt could default, they are considered extremely low risk.

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The Investment Association (IA) classifies the funds into two sectors, Short Term Money Market and Standard Money Market. Since 2019, they have conformed with the EU definitions set out in the Money Market Fund Regulation (EU) 2017/1131(MMFR). The main difference between the two sectors is the timescale over which their assets mature. Both sectors require the funds to have minimum amounts of liquid assets that mature daily and weekly. They can hold assets that will take longer to mature, but must control the Weighted Average Maturity (WAM) and the Weighted Average Life (WAL). Without going into too much detail, the WAM is a measure used to determine the sensitivity of a fund to changing interest rates and WAL reflects how a fund would react to deteriorating credit or tightening liquidity conditions.

The Short Term Money Market funds must have a WAM of no more than 60 days and a WAL of no more than 120 days. The Standard Money Market funds can have a WAM of up to six months and a WAL of up to 12 months. The theory is that the lower these numbers are, the less risky the fund is...there is less time for things to go wrong.

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The returns that you can expect are related to the bank lending rate, less the costs associated with running the fund and the fund manager’s fee. This means that these funds, although safe, can actually go down and that was certainly the case last year. Here is a table showing the performance of a number of Money Market funds over the last few years.

Data source: Morningstar.

Not much to get excited about, especially when equity markets were going up and other sectors were making healthy gains

However, in the first nine months of this year most of the world’s major stock markets have seen significant losses, and this is reflected in the average performance of the IA sectors. Last month, only five sectors made gains. USD Government Bond was up 0.4%, Latin America was up 0.05%, and India/Indian Subcontinent was up 0.09%. All of a sudden, the two Money Market sectors, which went up by 0.07%, are not looking so silly. Their returns have picked up in recent months, and if interest rates continue to go up that trend could continue.

Data source: Morningstar.

There are two funds that we monitor, Royal London Short Term Money Market and abrdn Sterling Money Market, that have risen by 0.6% in the last six months.

When nearly all the funds that we monitor are falling, it obviously makes sense to invest in something that is going up, however there are a few other things to take into consideration. You could probably earn more in a bank’s saving account, but that does not help if you want to keep your savings protected in a SIPP or Stocks and Shares ISA.

Also, check to see if you are already earning interest on the cash in your portfolio. I know some of the fund supermarkets definitely do, but the rates are not particularly generous. Finally, depending on which platform you are on, there will either be transaction costs or costs to hold the fund, which will erode your returns.

On balance, we decided that in our demonstration portfolios it was worth giving it a go, and so last week they both invested in the Royal London Short Term Money Market fund.

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