Risk warning

The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested.

A lot has changed since the first money market fund (MMF) was created in the US in 1971.

MMFs attract an array of investors. Today, they are an indispensable cash management instrument for corporates, financial institutions, insurance companies and pension funds globally. Other users, like family offices and foundations, have also incorporated them into their day-to-day businesses. The industry’s current size is around USD5.1 trillion1 in the US and approximately EUR1.5 trillion2 (and growing) in Europe.

A quick recap

MMFs are pooled open-ended (mutual) funds that invest in short-term instruments, such as call accounts/cash, commercial paper, certificates of deposit, floating-rate notes, term deposits, repos, and government/treasury/sovereign bonds. These instruments have short remaining maturities. MMFs are highly liquid and are used for diversification alongside traditional bank deposits. Investors and treasury departments with dormant cash are often hit with internal counterparty restrictions and limitations for their banking credit lines. With MMFs, investors benefit from the expertise of the fund managers, which helps them diversify their risk among additional counterparts.

As with all investments, the MMF’s underlying assets are held separately (in custody). By contrast, regular deposit money sits on the bank’s balance sheet. Due to their scale, MMFs allow investors to participate in a more diverse and better-quality portfolio than if they were to invest independently. It’s also quite common for investors to use multiple MMFs.

Short-term MMFs that adhere to the ESMA (European Securities and Markets Authority) guidelines must fulfil certain requirements. These include restrictions around liquidity, duration, minimum-rating requirements, and issuer exposure. Short-term MMFs must have the following characteristics:

  • minimum 10% of the fund volume maturing overnight
  • minimum 30% to mature within seven days
  • maximum weighted average maturity (WAM) of 60 days
  • maximum weighted average life (WAL) of 120 days
  • maximum 5% holding for any individual underlying issuer (excluding government and overnight deposits).

Public debt MMFs have similar characteristics to short-term MMFs, but invest 100% in government securities.

Standard MMFs are a longer-dated version MMFs. They have the following characteristics:

  • minimum 7.5% of the fund volume maturing overnight
  • minimum 15% to mature within seven days
  • maximum WAM of 180 days
  • maximum WAL of 365 days
  • maximum 5% holding for any individual underlying issuer (excluding government and overnight deposits).

MMFs have grown significantly in size and importance over the years, with institutional clients and corporates as primary investors. But the funds are also used by councils, universities, and private investors, which broadens the user base. That’s because MMFs tend to offer a competitive rate that is close to or above current interest rates. They also usually have no restrictions on access, which makes them a highly liquid asset with compelling returns. This is due to the underlying laddering of durations, which are actively managed in line with the shape of the yield curve.

But be warned: ‘money market fund’ is a broad term that covers different funds and investment time horizons. Investors must look at the prospectus to ensure the MMF corresponds with their desired risk profile. For example, some MMFs use derivatives for additional returns, which adds another layer of risk. Investment managers must therefore clearly state the use of derivatives in the prospectus and factsheets. Some MMFs are AAA-rated and some might not be.

MMFs also cover different investment horizons, which investors should consider when choosing a specific fund. The same is true when looking solely at returns. Higher returns tend to go hand-in-hand with higher risk.

Why now for MMFs?

Recent central bank rate hikes have brought interest back to an industry that has existed under the radar for a while; especially in the eurozone, where rates were negative or zero for 10 years. Rate hikes to curb inflation occurred across several currencies. This included the European Central Bank’s 10 consecutive rate hikes (EUR), the Bank of England’s 14 increases (GBP), and the US Federal Reserve’s 11 rises (USD) since last year. These rapid increases have spurred interest in MMFs, with EUR-denominated funds now showing attractive positive returns. MMFs are simple and convenient to use. As such, they’re a compelling complementary cash investment vehicle to traditional investment methods.

Our MMF expertise

At abrdn, we have a long history of managing liquidity assets, with around €47 billion across several currencies (as of 31 December 2022). Our expertise in the sector allows us to offer bespoke solutions to meet a client’s liquidity and yield requirements, as well as their investment time horizon. Our liquidity solutions are available for investors looking for daily dealing access or the potential to enhance their returns. We aim to achieve the latter through different strategies that are focused on duration, credit or a combination of both. Our goal is to ensure cash optimisation within a clearly defined risk budget.

For example, our AAA-rated liquidity funds are available in sterling, euros and US dollars. The minimum individual underlying credit quality for each is A1/P1/F1. abrdn has an extensive team of credit analysts who actively review eligible issuers, creating an approved list with durations per issuer.

Our range of liquidity solutions aims to preserve the value of capital and to provide investors with a return over traditional deposits. Many institutional investors and treasurers find this type of solution attractive as it allows them to efficiently manage their working capital.

We believe investors in our liquidity portfolios benefit from a highly experienced team of investment professionals who follow a robust investment approach. We take a long-term approach to short-term investing. This is based on three core tenets: capital preservation, liquidity maintenance and return stability.

  1. IMF Monetary and Capital Markets - Global Markets Analysis, February 2023
  2. ESMA, February 2023. Assets in 2021.