Are money market funds too good to be true?
We are often asked by prospective users of the Nedgroup Investments money market fund range how it is possible for us to achieve the yields of a fixed deposit with the access of a call account. “It sounds too good to be true. Where is the catch?”
When it comes to surplus cash, any financial manager or treasurer is obliged to explore any opportunity to improve yields, liquidity, convenience and diversification - and to thoroughly research and understand any investment vehicle they are considering prior to making use of it. And, while many treasurers and financial managers do this wherever possible, there is understandably a certain amount of scepticism when a product appears to comfortably promise to tick all the boxes.
To aide prospective users of money market funds, these versatile and useful investment vehicles, we want to take this opportunity to explain how money market funds achieve higher yields and can still offer liquidity. Knowing that the proposition is sound will hopefully enable financial managers and treasurers to confidently make use of money market funds to enhance interest and liquidity, and manage risk in a convenient and highly regulated environment.
Money Market funds overview
Money market funds started in the 1960’s in the USA and spread to Europe in the 1970’s. The American and European industries are now massive and well entrenched. Most countries that have unit trust legislation have a money market fund industry. The first money market funds were launched in South Africa in the 1980’s and since then, the industry has grown to exceed R360b. In 2020 the South African money market fund industry will pay investors in excess of R3b extra interest – that is over and above the best call rates available in the market, but without “locking up” the funds - which fixed deposits would require to achieve the extra interest.
How do money market funds achieve all this?
Money market funds make use of unit trust legislation to pool investor monies into a single unitised vehicle (a trust), so that this can be professionally managed for the benefit of all unit holders. The trust is ring-fenced with an independent trustee. For the Nedgroup Investments Money Market Fund this trustee is Standard Bank. The money market unit trust funds are operated by Nedgroup Investments using Taquanta Asset Managers as the Best of Breed specialist cash manager. Global Ratings are the independent rating agency who have assigned AA+ ratings to both the Nedgroup Investments money market funds. The funds are regulated in terms of the Collective Investments Schemes Control Act, audited, and subject to the strict internal compliance regime typical of a large banking group.
The scale achieved by pooling thousands of investors’ funds enables specialist money market fund management team to negotiate better yields with the issuers of fixed income instruments, predominantly big 4 SA banks, used by the fund. This additional yield is passed on to investors in the fund. The scale also enables the fund to spread assets between issuers to create a more diversified, and hence lower risk, portfolio of high quality assets.
But the main reason money market funds are able to offer higher yields than call accounts, but still provide full liquidity is their ability to invest along the yield curve – It’s win, win. The fund itself, which comprises all the collective deposits of thousands of users, is able to invest along the yield curve as far as instruments maturing in 13 months. These longer-dated instruments naturally provide higher yields than funds on call.
The fund holds an array of instruments of varying lengths - including short durations like one month, two months and six months etc. On average, the fund cannot have a weighted term to final maturity longer than four months - which means for every long-dated instrument, there will be short-dated instruments including a significant amount of call deposits in order to retain the average at four months. The longer-dated instruments provide the fund with yield while the call monies provide the fund with liquidity.
So what does this mean for investors?
- Liquidity and yield
Investors can come and go same day, and they will be funded by the call monies held within the fund, so they do not need to lock up their cash. However, while they are invested, they benefit from the higher yield that the fund is generating from its spread of assets across all durations. While investors are in the fund, they are effectively exposed to longer dated instruments, but with the flexibility to come and go. The units each investor holds provides them with effective exposure to their share of the spread of instruments in the fund. In many circumstances investors withdrawing from the fund are offset by investors depositing into the fund. Gross flows into the Nedgroup Investments cash stable average between R2 billion and R4 billion per day, but are often netted off resulting in much lower net flows.
- No minimum balances
There are no minimum balances as users are expected to take all their funds when these are needed. The money market funds are simply a parking place where cash can work harder until it is required.
- No transaction fees
There are no fees to transact. Fees are taken out of the yield. These are nominal and depend on investment size. Investors will therefore take a haircut on their yield equivalent to their fee, but only pay for the days they are using the fund. Furthermore, the incremental interest typically covers the fees many times over.
- Value-added services
There are additional potential savings that users of money market funds can benefit from in the form of the convenience of having a “one stop shop” and many investors use the money market funds as a type of outsourced treasury function with all the savings and convenience that comes with it.
The other options:
The alternative to using money market funds is for treasurers to invest themselves. However the disadvantages of this approach are:
- Lower yields as less buying power
- Less diversification as not enough scale to spread assets between issuing banks. For a single entity to deal with multiple banks also requires much effort.
- Enormous investment in time and systems to manage and report on a portfolio of deposits, shop around for rates, and renew or redeem these as needed
- Cost of time and employing fixed income and credit expertise
- Less liquidity as fixed deposits, which are what generates excess yield, cannot be accessed until they mature
So if you had wondered if money market funds are too good to be true the above should assure you that they offer a proven opportunity to put your cash to work in a highly rated, highly regulated funds without sacrificing the liquidity of a call account, and without having to compromise on credit quality or liquidity in order to achieve higher yields.
Why Nedgroup Investments?
Nedgroup Investments Cash Solutions is the market leader in providing money market fund solutions to the corporate sector and manages over R130b of cash for a large client base including blue chip corporates, banks, insurers, medical schemes, asset managers, parastatals and multi-nationals. By investing in a Nedgroup Investments Cash Solutions Fund, your investment is spread across a range of banks and other credible issuers which means your risk is reduced even further, without compromising on yield or liquidity. And, when an opportunity arises to put that cash to good use, it is available on the same day. Our dedicated Corporate Cash team will be on hand to assist you. We are happy to take you through the way that we work and how we make sure that your cash investment is optimised while you focus on your day-to-day business. At Nedgroup Investments Cash Solutions we believe money must work.
Contact the Nedgroup Investments Cash Solutions team to discuss how we can help you optimise your balance sheet today.