This year has seen a surge in corporate investment allocations to short-term money market funds. According to the US Office of Financial Research, the total of all US MMF investment rose from a little over $5 trillion at the beginning of 2023 to over $6 trillion by the last week of October. On the face of it, this looks like a hot market. But should it be even hotter? And if so, what can funds and the portals that serve them do about it?
After years in the doldrums, when returns from MMFs hovered close to zero, institutional money market funds now look like one of the most attractive vehicles for short-term investors.
Yet when we drill down into figures on money market performance in the US and Europe, there are signs that some funds could be losing out on what should be the biggest growth opportunity in a generation.
There are several such opportunities to be had for those fund providers and portals ready to capture them:
- Corporate and institutional investors are still holding a large amount of their short-term cash in banks, despite perceived weakness and risk in the banking sectors in the US and Europe. Typical organisations currently hold around 47 per cent of short-term cash in banks, less than last year but still one percentage point more than in 2019. Given the relative attractiveness of the MMF market compared to the bank deposit market, it is surprising that MMFs are not taking a larger share of institutional funds.
- Hidden beneath the headline figures are performance disparities between the best-performing US funds. While more competitive funds have held on to their inflow gains through 2023, several funds have not done so – with some having given up almost all their 2023 gains. The MMF market may be growing, but it is also becoming more competitive, and the funds with the most compelling offers may be taking flows from weaker competitors.
In European markets, monthly allocations to MMFs are an order of magnitude smaller than US flows: according to the Institutional Money Market Funds Association which tracks all institutional MMF investment in Europe including the UK the total stood at $1 trillion at the end of October. Many explanations have been advanced for this, including lower European MMF rates and fewer AAA-rated government debt funds in Europe. This is no doubt a result of the low – zero or even negative – yields that the region has endured for over a decade. From a business perspective, it means there is now a generation of treasurers who have little understanding of how to manage MMF’s and use them as a powerful too to optimise their balance sheets.
The MMF industry is a commodified market where customers find it difficult to tell offers apart. Portals remain an integral part of the customer offer from MMFs, but this is a highly competitive market with both funds and banks seeing ever-more technically sophisticated portals as the way to capitalise on the growth of interest in MMFs. Yet despite growing allocations to MMFs, margins are tight and the investment case for developing home-grown customer portals remains finely balanced.
As long as both funds and portals need to differentiate themselves to attract investors, they will need to up their marketing game. Here’s how:
- By offering a frictionless, automated end-to-end investment experience that keeps cost and risk down,
- By being quick, simple and low-cost to integrate with – making it easier for investors to access a wider range of funds,
- By offering more services that allow customers to see funds and the portals that serve them as a one-stop service. This will lighten the treasury burden, offering settlement and cash sweeps on top of simple trading and market analytics.
This is the mission of Calastone Money Market Services: to integrate and automate the MMF investment process for fund providers, intermediaries and investors, increasing ease of use and cutting costs at all stages of the short-term investment journey.