Investor caution boosts demand for money market funds

Investors continued to sell funds in October, but the amount withdrawn slowed to £137 million from £1.5 billion in September.  

Both equity and bond funds were out of favour, with outflows of £376 million and £429 million respectively, as investors reduced risk. Investor caution is reflected by Short Term Money being the best-selling sector in October, attracting inflows of £650 million. Three other cautious sectors were in the top five most-popular sectors: Volatility Managed (£268 million inflow), Specialist Bond (£221 million), and UK Gilts (£206 million). The outlier is Japan, which saw £229 million invested.

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Money market funds are among the lowest-risk fund types. These funds own a diversified basket of very low-risk bonds that are due to mature soon, normally in under a year. They can also put money into bank deposit accounts. As a result, investors can earn an income on their cash with minimal risk. When interest rates rise, the income generated by money market funds increases, causing fund yields to rise, which has increased their appeal among investors.

On the interactive investor platform Royal London Short Term Money Market was the most-bought fund in November, beating Fundsmith Equity. Royal London Short Term Money Market currently yields 5.3%. Four other money market funds yielding above 5% are Premier Miton UK Money Market, L&G Cash Trust, Fidelity Cash, and Invesco Money (UK) No Trail.

On the back of money market funds becoming more popular, the Bank of England and Financial Conduct Authority (FCA) are looking to improve the resilience of the fund sector in the event of market stress, where investors rush to withdraw assets from such funds. Last week, the FCA proposed new regulations for money market funds that would see the minimum daily liquidity requirements rise to 15% from about 10% at present, and the weekly requirements should increase to 50% from about 30% currently.

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Further reflecting investor caution, tracker funds – those that passively follow the up and down movements of a particular index – saw their highest outflow on record, with £331 million withdrawn.

Chris Cummings, chief executive of the Investment Association, put investor pessimism down to the cost-of-living crisis.

He said:“While we saw a smaller outflow in October following September’s £1.5 billion outflow, it remains a challenging environment for investors. Short Term Money Market was the best-selling sector, with investors parking their savings and taking a ‘wait-and-see’ approach as the cost-of-living crisis continues to impact the ability to invest.

“We may see savers re-allocate their funds once market conditions have calmed down. However, in the meantime, investors are gravitating towards safer asset classes, and UK Gilts and other Government Bond funds were selling well in October.”