Ongoing conflict in the Middle East and the resulting economic fallout is driving investors to seek defensive and liquid positions in their portfolios, seeing money market inflows surge.
Total money market fund assets increased by USD122.35 billion to USD7.75 trillion for the week ending Wednesday, May 6, according to the Investment Company Institute largely driven by intuitional investors.
Looking at the retail markets, in the UK the Investment Association reports that money market fund saw their strongest monthly inflow on record this March reaching GBP2.01 billion.
Chris Brown, Head of Money Markets at Insight Investment, says given the frequency with which investors are experiencing severe markets events over the past decade, liquidity has gained importance.
“Expectations are changing quite quickly, and it’s two directional in that rates go up and down. The key for us as a manager of money market funds is to retain flexibility within the portfolio to take advantage of those opportunities. This means having a very healthy respect for market conditions and short date liquidity, rather than chasing every basis point.”
Brown argues that since the global financial crisis (GFC), the profound impact on the secondary markets driven by the retreat of large banks as dealers in bonds and other securities, is putting money market liquidity under pressure.
“There’s a great saying that liquidity only matters when it matters. Post the GFC, there was no real depth to the secondary market. Yes, there are pockets of liquidity, but the real buyers of secondary market paper are typically our peers, so other money market funds. What we see in crises and periods of wider market volatility, is that typically, our flows are directional. We’ve always been very conservative from a liquidity and positioning perspective, ensuring that funds are never bar belled. What we want is a constant stream of maturities to cater for any eventuality or possibility of outflow.”
Brown says that as the uncertainty persists in the Middle Est and beyond, institutional investors will treat money market funds less as temporary safe havens and more as permanent components of liquidity and risk management strategy.
“Money market funds do offer a compelling investment. They haven’t exhibited the kind of wider market volatility that historic risk-free assets have shown and have a much better capitalisation than they did 10 to 15 years ago. I think investors are very comfortable with money market funds as a product in general.”
However, Miranda Seath, Director, Market Insight & Fund Sectors at the Investment Association, notes that investors remain committed to a diversified approach that includes risk assets.
“Looking ahead, investors will continue to monitor geopolitical developments and their impact on the macroeconomic environment. While short-term volatility has led to more cautious positioning, many investors are holding strong and remain committed to their long-term plans, reinforcing the importance of diversification and a disciplined approach to investing.”
