Looking at global MMFs, every kind of investor now uses these funds. This group includes financial organisations like custodians, asset managers, banks, wealth managers, insurance companies, and family offices. Domestic and multi-national corporations, both listed and private, and the non-profit sector also uses MMFs

Many of these investors have incorporated MMFs into their day-to-day businesses. The size of the industry is currently around US$6.24 trillion1 in the US and about US$1.8 trillion [1] outside the US. The latter, however, is still in its early growth phase, with countries in differing stages of the product life cycle.

A quick recap

Short-term MMFs LVNAV (low volatility net asset value) are pooled open-ended (mutual) funds that can invest in money market instruments. These include cash, term deposits, commercial paper, floating rate notes, and governments/Treasuries. MMFs are short-term fixed-income instruments, with an underlying individual duration maximum of less than 397 days. Credit agencies might also rate them, offering a structured framework for investment decisions.

These AAA-rated short-term MMFs LVNAV are considered highly liquid, providing daily access. Investors also use them for diversification and to complement traditional bank deposits. Investors with working capital or surplus cash are often hit with internal restrictions for their investment limits with their bank counterparties. AAA-rated short-term MMFs LVNAV offer a convenience factor, with many other advantages including the highest credit quality and diversification. Inhouse credit teams review and approve these instruments and set duration limits to each issuer. Short-term AAA-rated MMFs are the most liquid MMFs and have the shortest underlying maturities within their portfolios.

MMF’s underlying assets are held separately by a custodian bank and are an asset management product. By contrast, regular deposit money sits on the bank’s balance sheet. Due to their ESMA (European Securities and Markets Authority) and credit agencies restrictive investment framework, MMFs also allow investors to participate in a more diverse and better-quality portfolio than if they were to invest independently. It’s quite common for investors to use multiple MMFs. Depending on auditor confirmation and applicability, short-term MMFs LVNAV can be considered cash or cash equivalent due to their high liquidity, daily access to the invested cash and other attributing factors.

All AAA short-term MMFs LVNAV must adhere to the ESMA guidelines. This includes restrictions around liquidity, duration, minimum rating requirements and issuer exposure. A fund must have the following key characteristics to be classified as a short-term MMF: 

ESMA-regulated Money Market Funds (MMFs)

Source: abrdn, 2024. 

Where applicable, credit agencies complied with ESMA rules when they were created in 2019, and MMFs can select which credit agency or agencies they want to assign a AAA rating. This method can provide an extra step in deciding where to invest and is attractive to those investors familiar with choosing places to put their money that have the highest credit ratings. This is often in line with existing investment policies and adds an additional layer of comfort.

The nature of a short-term MMFs LVNAV means that a higher investment limit should apply to an MMF versus an investor’s deposit with a single counterpart. These limits can be numerical or relative to the MMF's size. The differentiation is often considered and, where relevant, incorporated into an investment policy.

The US domestic banking crisis 18 months ago dented trust in many banks and led to significant inflows into MMFs. MMFs have grown significantly in size and importance, offering a competitive return close to or above current base interest rates.

Generally, because of the underlying composition and durations, AAA-rated short-term MMFs (LVNAV) should deliver returns like what you'd get from an average one-month bank deposit – but with the aforementioned benefits. Plus, AAA-rated short-term MMFs (LVNAV) let you take out your money when you need it, in accordance with daily cut-off times. On the other hand, standard MMFs, which are longer term, might not let you withdraw your money immediately; withdrawals could take a day (i.e. T+1) to process. Also, these longer-term funds are more like investments and are accounted for differently (using VNAV accounting). As a result, they're not necessarily considered as ‘cash and cash equivalents (which, where applicable, must be qualified auditor opinion).

ESMA ensures MMFs fall within its definition and refers to three fund types: short-term MMFs CNAV (constant net asset value), which includes public debt funds; short-term money market/liquidity funds LVNAV; and standard money market funds VNAV (variable net asset value). As such, 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 whereas others might not. Funds that use derivatives instruments carry a higher risk than funds that don’t. The same is true when looking solely at respective returns. Generally, higher returns often go hand in hand with higher risk.

MMFs – always a good time to invest?

Over the past few years, high inflation across the globe led central banks in the US, UK and Eurozone to aggressively hike interest rates. This has made liquidity fund investing attractive again, particularly in euro-denominated MMFs. Many are now delivering compelling returns following years of negative performance. That said, the European Central Bank and the Bank of England have recently started cutting rates, with the US Federal Reserve following suit on 18 September. This, though, hasn’t dampened investor appetite for MMFs. Indeed, potential returns are still competitive because they are always relative to base rates. Nonetheless, following interest rate cuts, fund returns will slowly adjust  downwards towards the new base rate with a temporary higher MMF yield lag out of kilter to the norm. However, MMFs can offer higher-for-longer returns by investing in longer maturities underlying, while staying within their guidelines.

Our MMF expertise

At abrdn, we have a long history of managing liquidity assets, with around US$52 billion (bn) of AUM across several countries within our fixed-income franchise, which has overall AUM of US$171bn (as of 31 March 2024). Our expertise in the sector allows us to offer bespoke solutions to meet clients' 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 seek to achieve the latter through different strategies focussed on duration, credit or a combination of both. Our goal is to ensure cash optimisation within a clearly defined risk budget.

Our range of liquidity solutions aim to preserve the value of capital and provide investors with a return above those available from traditional bank deposits. Many institutional investors find this type of solution particularly attractive as it allows them to more efficiently manage their working capital.

Investors in abrdn's liquidity portfolios benefit from a highly experienced team of investment professionals who follow a robust investment approach. We also take pride in pursuing a long-term approach to short-term investing. This is based on the three core tenets of capital preservation, liquidity maintenance and return stability.

 

The value of investments and the income from them can go down as well as up, and investors may get back less than the amount invested. Past performance is not a guide for future results.