What You Need to Know
- Investing can be a business of picking up pennies in an uncertain world, and cash management can add to a bottom line.
- MMFs are diversified portfolios of highly liquid assets designed to provide income, price stability and liquidity.
- MMFs are easy to use, easy to get into, easy to get out of, and offer a fair market rate of return.
With the U.S. Federal Reserve raising rates, managing cash has drawn greater interest. For the past two years, there was little cost to simply leaving money in a bank account; now the difference is more meaningful. Because of inflation, supposedly risk-free “money in the bank” actually loses money.
Cash should be an active part of every investor’s asset allocation decisions, and we believe superior cash management requires a dynamic approach to capturing yield.
To best serve their clients, financial advisors must go from passive to active investors in cash. Because cash is a vital if sometimes undervalued component of investor portfolios, these can become “value add” conversations with clients.
For those who do not want to risk their money by investing it, or who take some or all out of the markets while looking for the next opportunity, there are alternatives.
Investors may consider stable NAV money market funds (MMFs), diversified portfolios of highly liquid assets designed to provide income, price stability and liquidity.
Investing can be a business of picking up pennies in an uncertain world, and by staying very conservative, MMFs can add to investors’ portfolio of returns.
Inside Money Market Funds
Numbers are growing, and striking. According to iMoneyNet, the average seven-day current yield from the top institutional government MMFs provides a good measure: Over the past 12 months, MMF yields averaged 2 basis points (bps); on March 31, the top 10 MMF funds by AUM ($1.5 trillion) had climbed to 20 bps; and market pricing is implying a jump by year-end to 2%.
Since the COVID-19 pandemic hit, yield on cash has been hard to find. Fed rate hikes should lead to greater yield potential for cash investors and widening spreads between MMF yields and bank deposit rates.
Although bank deposits have sometimes offered incremental yield over MMFs in the lead up to rate hiking cycles, MMFs quickly overtook them in past cycles.
Cash investors must balance principal stability, liquidity and yield. Markets typically allow the achievement of only two of these goals at a time, often at the expense of the third.
Investors must consider how the features of bank deposits and MMFs can facilitate their investment objectives.