Money market funds are expected to continue seeing strong inflows even as the Federal Reserve's rate-hiking cycle comes to an end, sources agreed.
And while inflows could slow when the Fed eventually moves to cut interest rates, managers are confident that demand will remain high relative to the low-rate period of 2008-2022.
In March and April 2020, money market fund assets leapt 16.17% and 12.13% month-on-month as the stock market plummeted, and even though there hasn't been double-digit growth since, total assets have continued to climb. Between June and December 2023, the total assets grew 8.39%. Over the past five years, total assets grew to $5.89 trillion as of Dec. 29, from $3.6 trillion on Dec. 31, 2019.
Money market funds are currently yielding "very nicely" at 5.5%, said Philippe Billot, head of money markets at Pictet Asset Management, in an interview in Singapore. "So it's very competitive vs. deposits. And on top of liquidity, also in terms of risk management, money market funds are relatively sophisticated instruments," he said.
Given the uncertainties on inflation, interest rates will be higher than they used to be and yields are not likely to return to the levels investors saw five to seven years ago, he said. "Interest rates were almost zero in U.S. dollars and negative in European currencies and I'm not sure central banks were happy with (that) situation," he added.
At Pictet AM, which managed 230 billion Swiss francs ($251.7 billion) in assets as of Sept. 30, money market funds are diversified and assessed for credit and liquidity risk.
The fund manager also actively manages its duration. Over the past two years, Pictet AM has kept a low duration positioning in its U.S. dollar money market portfolio, with about $10 billion of the $57 billion under management in money markets having a duration of less than 10 days.
The duration has been increased now to 48 days and can go up to 60 days, "which is overall not a lot," Billot admitted. "But when you manage $60 billion it can be sensitive – every basis point of a basis point (matters). We live in a very small world in money markets but with huge amounts."
The total net assets of money market funds stood at $5.96 trillion as of Jan. 17, of which $3.63 trillion came from institutional investors, according to data by the Investment Company Institute.
The team has seen its AUM grow by about $20 billion over the past two years, from a variety of investors including institutional, wealth management and distributors.
Institutional investors have also been motivated by the need to diversify risks after the banking troubles of last year. "The Credit Suisse situation (was) something that was not really in the cards two or three years ago because regulation was supposed to solve all the problems. And then of course, institutional investors were really confident in the capacity of their custodian to keep their level of confidence of safety, but that has not been the case," he said.
In June, UBS completed its acquisition of Credit Suisse after the latter announced a 7.3 billion Swiss francs net loss for 2022 — its largest loss since 2008 — which sparked a bank run that left the bank in crisis.
Institutional investors have found that they need a policy for cash investments, he added. They need to know if their cash is well placed if it stays uninvested with the custodian, and where to invest it if they want to invest proactively, he said.
Money market inflows are likely to continue to be strong in 2024, agreed Thomas Kaegi, chair of the Investment Management Association of Singapore and managing director, head of asset management for Singapore and Southeast Asia at UBS.
Looking back following the rate hikes of 2006 and 2007, flows to money markets continued for some time even when interest rates plateaued and started to fall, he said.
Fund managers that offer money market funds have benefited from this, but it also means lower profit margins, he added.
"A trend that the asset management industry globally is facing is that margin compression may have accelerated over the last couple of years," Kaegi said at an IMAS media roundtable in Singapore on Jan. 4. "The drivers are well known – the move to passive and in the active space, fees are coming down. Additionally with cash rates obviously many people are moving from equities or fixed income to money market funds."
An IMAS survey conducted in November and December with 79 respondents from 68 fund management firms in Singapore that manage over $35 trillion globally found that margin erosion was viewed as the third biggest threat to the growth of the investment management industry over the next 12 months.
The economic uncertainty that kept investors from investing cash and higher deposit rates that are putting pressure on asset flows were found to be the first and second biggest threats, respectively.
However, some institutional investors have already started to seek more duration exposure to lock in a longer-term yield, which means shorter-term money market funds could suffer, said Stephen Tong, senior client portfolio manager focused on managing multiasset portfolios at Franklin Templeton Investment Solutions.
Franklin Templeton managed $1.42 trillion in assets under management as of Sept. 30.
"A 10-year or five-year (fixed-income asset) gives a very decent yield right now. And from there, you will further benefit when the Fed finally starts to pivot and the price of fixed income rises," Singapore-based Tong said in an interview.
Money market funds still have very good liquidity, but if the client is thinking from a total return perspective, they would be thinking about whether short-term duration is where they want to be, he said.
If an institutional investor decides they want to adjust their total portfolio return and increase the duration of their portfolio, one of the places that will lose out are shorter-duration fixed-income assets, including money markets, he added.
