Low Risk But Not Risk Free Joe Scott-Soane jscottsoane@arlingclose.com

UK money market rates have been on a downward trajectory since March when the coronavirus pandemic began to wreak havoc on the global economy. Between market turmoil and falling bank rates worldwide, Money Market Funds (MMFs) have been grappling with how to best proceed in this prolonged low yield environment. Looking at data taken at the end of October, the 7-day yields offered by MMFs have fallen to below 0.10% which brings the return on these funds very close to zero or even negative in some cases.

The response by fund managers has generally been to waive management fees to maintain a positive (or at least 0%) net return for those invested in the fund. But how long can this situation persist? There are of course costs to keeping the fund running and while management fees are waived the fund will have to operate at a loss and with no signs of rates rising in the near future it is unclear how long they will be able to continue.

Since March, Arlingclose has stepped up its monitoring of liquidity levels and assets under management (AUM) of the funds that we recommend. While MMFs are among the safer investment options due to their low risk and widely diversified investments, the current climate of high market volatility can lead to a situation where the last investor to withdraw their funds is left taking all the losses if sufficient liquidity levels are not met.

Toward the end of March, a review of the liquidity levels of all sterling MMFs led to a temporary suspension on several funds on our recommended list. This advice proved to be prudent as one of these suspended funds recently had to close. The combination of small AUM, recent large outflows and waived fees had made it unsustainable for the fund manager. Luckily, the fund had sufficient liquidity to pay back its investors on the closure date. Nonetheless, this closure highlights the importance of closely monitoring MMFs, especially during the current unpredictable market environment.

Despite the difficulties faced by MMFs in these trying market conditions, at the time of writing there has not been an instance of a UK fund “breaking the buck” by allowing the NAV of the fund to fall below the stable £1 level during the coronavirus pandemic. Nonetheless, future spikes in coronavirus cases and the possibility of dipping into negative rates continue to pose risk for investors. We at Arlingclose continue to diligently monitor fund performance and recommend that investors do necessary due diligence before placing investments and get in touch with any specific queries regarding MMFs.