As noted in one of our recent insights, Accounting for Negative Interest Income, even in the absence of negative policy rates in the UK, continued downward pressure on UK yields has brought net returns on sterling short-term money market funds (MMFs) close to zero even after managers have temporarily lowered their fees.
The lowering of these fund fees for institutional clients has been a structural trend in recent years given the interest rate environment we have found ourselves in. Gross MMF yields are now approaching such low levels that a zero return has already been experienced by some investors and further waiving of fees is being implemented to avoid negative net yields.
This certainly doesn’t apply across the whole sterling MMF market just yet, but all the funds will be keeping a close eye on their daily yields. It’s not an unexpected step given the precedent set when euro-denominated MMFs went on their journey from positive to negative yields in 2014. Most MMFs will aim to keep their returns to investors in positive territory for as long as possible, particularly given the ease with which money can, and does, flow from one fund to others that are offering more attractive yields.
Perhaps this means ‘temporary’ fee waivers will remain in place for some time and, whilst the management fees can be temporarily lowered or waived, funds also incur running costs - for how long MMFs decide to swallow these costs if fees reduce below these levels remains to be seen. This may be more keenly felt by those MMFs at the smaller end of the assets-under-management scale.
Of course, MMFs are able to structure their underlying assets in order to take advantage of longer-dated opportunities where yields are better and, looking at current fund weighted average maturities, this approach continues to be used to keep overall yields that bit higher for most MMFs. This is why MMFs typically take longer than other liquidity products to reflect falling yields, but the march downwards has still taken place at a decent clip.
At this stage net negative returns are not the base case of most managers over the short-term, and fee waivers should maintain positive net yields, but the possibility cannot be ruled out. Funds will be preparing for this. There may be a need to move investors from distributing to accumulating share classes, so that negative returns can be reflected daily. Whatever happens, we expect MMFs to clearly communicate with their investors in a timely fashion ahead of any such move.
Negative yields, if they do happen, will be something new for sterling cash investors to grapple with but MMFs themselves have plenty of experience of managing such a situation from the euro and/or yen side of their businesses. Observations from those markets suggest that MMFs will ultimately remain an attractive liquidity tool to investors even if they no longer get back exactly as much as they put in.