Views appear to differ markedly at private banks about the usefulness and attractions of money market funds.

Even if interest rates have peaked, they’re unlikely to revisit the ultra-low levels that caused asset allocators to go up the risk scale in search for yield, as happened in the past decade. And, as this publication noted in its interview with Aviva Investors, money market funds have benefited from rising rates.

A money market fund is a type of mutual fund, typically holding cash, government securities or repurchase agreements collateralised by government securities.

Moody’s says the underlying financial climate will keep MMFs popular.

“In 2023, money market funds’ assets reached record levels as rising yields re-established them as a portfolio `building block’. While interest rates will likely decline in 2024, we foresee further moderate growth of assets under management as regional military conflicts and electoral uncertainty make investors more risk-averse. This will drive continued growth in money market funds sponsors' revenues,” the rating agency said. 

This news service asked private banks what they thought about money market funds (MMFs) and their place in the wealth management toolkit. 

Views differ markedly.

“Our clients do use MMFs and we have seen an increased use of these, as well as ultra short bond funds, over the past couple of years given the trajectory of interest rates,” Sue-Wei Wong, head of investment specialists for Europe and the Middle East, Citi Private Bank, said. “We would generally agree that demand hasn’t been as strong in the UK as the US given the level of interest rate increases – but we have seen an increase and there are different considerations for UK investors vs US – from a structure and therefore tax perspective.”

Clients view MMFs as an alternative to deposits and, given the volatility we saw in the banking sector last year, we have seen clients wanting to diversify their counterparty risk,” Wong said. 

At Coutts, the UK private bank said clients use MMFs, but a possible drag on their adoption is that UK government bonds (gilts) benefit from tax advantages already.

“Our clients can directly access a range of money market funds through our execution only service. They have become more popular with clients since 2022 (in line with rates), but still represent a minority of cash holdings,” a spokesperson for Coutts told this publication. 

“We also use money market funds as a proxy for cash within our discretionary portfolios. Since our benchmarks are fully invested in equities and bonds, money market funds are used tactically by our investment team, and this use has not meaningfully increased recently,” the spokesperson continued. “Our discretionary investment portfolios are designed to grow clients’ wealth over longer time horizons. Although cash rates are more attractive now than they were, for long-term investors such as our clients, equities and bonds are more attractive."

The bank said one potential headwind to MMF adoption in the UK amongst HNW investors is the tax efficiency of gilts. “In the UK, gilts are free from capital gains tax, but coupons are eligible for income tax. This means low coupon gilts, which are trading below par, can offer an attractive savings vehicle for HNW investors, relative to other vehicles that are eligible for income tax, such as MMFs or cash deposits [interest],” the bank said. “We have seen interest in UK gilts amongst some of our clients, although the attractiveness will depend on the individual circumstances of the client. This increase in interest in UK gilts has likely provided competition for MMFs in the UK, and means for some investors gilts are a more attractive alternative to cash than MMFs,” Coutts added.

Not so keen
At SG Kleinwort Hambros, there is a different perspective.

“Whilst money market funds can make sense in certain circumstances, in many cases there are better investment options available,” Gene Salerno, chief investment officer, said. “For example, simple short-dated (e.g., 0 to five-year) investment grade bond funds and ETFs offer attractive yields, whilst also offering slightly less re-investment risk should rates decline in the short term, as is expected later this year.”

“We have MMFs available for investment but do not use them widely today, largely for lack of need,” Salerno said. 

“Also, with many UK gilts trading materially below par value, they continue to offer interesting tax advantages for UK taxpayers. Most of the return on such a bond will come in the form of a capital gain, which – for most UK gilts – is exempt from capital gains tax in the eyes of HMRC,” Salerno continued. 

“Finally, as a bank managing client funds on a discretionary basis, where we do hold some client cash in portfolios as buffers, we’re paying attractive rates directly to clients already.”

The presumed safety of MMFs is a plus point for some clients, said Citi Private Bank’s Wong.

“Many investors have seen it as a safe way to earn on their cash whilst more attractive opportunities become available,” she said. 

“We have a sufficient number of MMFs available to clients on our platform. Given the nature of MMFs, there is limited real differentiation between competitors and so this comes down to service, speed and transparency of reporting, as well as fees. Investing in MMFs for individual UK clients will also come with consideration of any tax advantages – for example gilts vs MMF,” she said.

Kleinwort Hambros’ Salerno likes gilts because of their valuations – another reason for his not being all that keen on MMFs.

“With many UK gilts trading materially below par value, they continue to offer interesting tax advantages for UK taxpayers. Most of the return on such a bond will come in the form of a capital gain, which – for most UK gilts – is exempt from capital gains tax in the eyes of HM Revenue & Customs,” he said. “Finally, as a bank managing client funds on a discretionary basis where we do hold some client cash in portfolios as buffers, we’re paying attractive rates directly to clients already.”

Asked if there are enough MMFs available to offer attractive options, Salerno said his bank has been able to source funds as needed, but the lack of attraction, in his view, is “more structural.”

“In keeping with that long-established culture, the structure of the US market is more attractive. Investors can easily invest cash directly with the money market fund provider. They can avoid the hassle of setting up a general brokerage account for holding the fund and won’t pay associated brokerage account or trading fees,” he concluded.