Investors swell money market funds

UK-based money market funds saw a swell in inflows ahead of the tax year end on April 5, as rising rates boosted their appeal to retail investors.

Investment platforms, headed by market leaders Hargreaves Lansdown and Interactive Investor, said they had seen customers turn to money market funds in the first quarter of the year as yields increased.

Hargreaves reported a “huge increase” in net flows into money market funds in the first quarter year-on-year, while Interactive Investor experienced a 300 per cent increase in the same period. Analysts said this was from a low base, but showed funds were coming back into play for some investors after years of near-zero interest rates.

Some investors are thought to be parking money in money market funds with a view to committing cash into longer-term equity purchases once the current turmoil subsides.

“Uncertainty is causing investors to pause a bit longer before making investment decisions, though, from a longer outlook perspective, investors will need to get back into other asset classes,” said Beccy Milchem, head of international cash management at asset manager BlackRock.

Changing patterns of behaviour signal a tentativeness among retail investors whose confidence has been dented by volatility, with improved offers on cash providing a safe haven for savers seeking to top up tax wrappers.

Money market funds invest in what are considered safe liquid assets, such as short-term government debt, which are due to mature soon. Investments are considered low risk, though, unlike bank deposits, they are not covered by any deposit protection scheme.

Investors can use money market funds to park cash balances within a tax-free wrapper such as a Sipp or Isa at more attractive rates than if they had simply kept cash on a platform, where interest rates sit at around 1 per cent. This is particularly advantageous in light of shrinking tax allowances on savings outside tax-free wrappers.

“They make sense for investors under certain circumstances,” said James Norton, head of financial planners at Vanguard UK. He said some may have been using money market funds to delay investment decisions, while retirees in drawdown — who hold some cash as income — were seeking improved returns.

Norton added: “You have to be careful as a money-market fund delivers lower returns than equity in the long run.”

Vanguard’s sterling-denominated money market fund experienced a 29 per cent spike in net assets between February and March this year, according to Morningstar. Yields on the Vanguard fund sit at around 4.12 per cent, with others also offering near the bank rate.

“Most of these products will try and track [the Bank of England’s risk-free short-term rate],” said Rob Morgan, an analyst at investment manager Charles Stanley. “You can tactically use cash and get a return and that is going to be an important part of portfolio construction.”

Despite growing demand, funds flows have remained lower proportionally than in the US, where retail investors flocked to money market funds late last year after major banks such as JPMorgan Chase and Bank of America offered low returns on deposits despite increases in the Federal Reserve rate.

Unlike their US counterparts, most UK banks and building societies have moved swiftly to increase rates on savings accounts in the wake of monetary tightening. Easy access accounts have circled around 3 per cent, while Barclays offers Reward customers 5 per cent on balances up to £5,000.

Inflation is likely to remain high for much of this year, having fallen slightly to 10.1 per cent in March. The Bank of England is expected to continue raising rates in response, keeping money market funds attractive in the near future.

This article has been amended since publication to correct the yield on Vanguard’s fund.