The asset class’ sentiment jumped 5.8 percentage points from Q2 and moved to 10th most popular asset class out of 26 in Q3 from 21st in Q2.
Last Word Research conducts quarterly surveys with hundreds of fund selectors across Europe every quarter.
The surge in the popularity of cash and money market funds – that invest in short-term debt to reduce risk – has been driven by the surge in volatility this year coupled with a rise in political uncertainty that has led investors to reduce exposure to risk.
“Sweden, Spain, Switzerland, and the Netherlands have the most fund selectors who are looking to add to their cash exposure,” the research said that
“It’s can be frustrating when you speak to a money market fund manager and they tell you how brilliant their fund is. But at the end of the meeting when you ask what their fund will return they present numbers such as -0.5% or -0.4%.”
For the Swedes cash and money market funds sat at equal third (with private equity) most popular asset class out of 26 during the quarter.
Over the 12 months to September 2019, 31% of Swedish selectors looked to increase their cash allocations, 42% to hold, 8% to decrease, and 19% did not use the asset class.
Protection in a shaky market
W&W Asset Management head of fund of funds portfolio management, Carsten Riester, told Expert Investor that the move to cash was not to gain yield but to gain protection in a shaky market.
“It’s can be frustrating when you speak to a money market fund manager and they tell you how brilliant their fund is. But at the end of the meeting when you ask what their fund will return they present numbers such as -0.5% or -0.4%,” he said.
“Not only do you not make any yield there is also the cost structure to take into account that might cost 10, 15, 25 basis points depending on innovation.”
Riester said it was impossible to make a positive yield within the asset class but the case for investing in money market funds was that it tended to lose less in a downturn compared to other asset classes.
He said the difference could be losing 20% in an equity market compared to losing zero to 0.5% in a cash fund.
“However, if stock markets performed well then it’s not smart to put money in money markets,” Riester said.
October’s rush to cash
According to Morningstar data, flows into European money market funds in October 2018 was at €52.5bn – the highest monthly flows over the past decade. The second highest monthly flow was in January 2008 at €49.3bn.
This is in line with October’s equity sell-off that saw the sharpest one-month decline for global equities since May 2012 and bond markets reflected the risk-off market sentiment with government bond yields outside the US lower, according to Schroders.
However, over the year to October money market funds experienced flows of €25bn after six months of outflows. February and September suffered the largest outflows so far at €36.7bn and €19.3bn respectively. Flows for 2018 has been the lowest since 2013’s outflows of €44.8bn.
Morningstar’s EMEA editorial director, Ali Masarwah, said that the outflows experienced this year were due to the lack of return from money market funds along with fees of around 40bps.
“Cash is deeply unattractive these days. We’re only one and a half months in to this risk-off mode and if it continues then money market funds are definitely an option,” he said.
“I would expect the typical risk-off assets to gain traction like government bonds and money market funds as losing 40bps is better than losing more in equity markets.”
Lipper at Refinitiv’s head of Lipper EMEA research, Detlef Glow, said money market funds were used as a parking spot and outflows were often seen during Spring when dividends had to be paid out.
He noted that the asset class was a safe haven and if volatility continued to rock markets then investors would most likely continue to invest in money market funds.
“While it was quite surprising to see outflows for money markets in this kind of environment, €40bn in outflows during the first nine months of the year is normal,” Glow said.
“It includes all of the corporates and institutions in Europe so in that context it does not mean there is a dislike towards the asset class it is just that institutions need money for something.”
Lipper found that with flows of €2.2bn the Polish zloty was the best-selling money market sector during the first nine months of 2018, followed by US dollar (€1.6bn), and Swedish krona (€1bn). The euro suffered the highest outflows at €25.7bn, bettered by outflows from the pound sterling at €19.5bn, and euro leveraged at €1.3bn.
Lack of innovative funds
Riester said that if markets had more risk a pure money market fund would do better than an enhanced money market fund.
“I have a risk budget so I try to be a little better than pure money market ideas especially in a shaky market. I try to at least have the opportunity to make a positive performance net of fees,” Riester said.
“I think the target should be at least to invest only in vehicles where you have a chance to make a zero or a positive performance including the costs that all the vehicles have.”
Riester said that he was looking for smart plus money market concepts that included bonds or asset-backed securities rather than actively managed pure money market funds or money market exchange traded funds (ETFs) but that there were not many in the market.
“While I’m actively trying to give clients a chance to make a positive return if I look at the performance in 2018, none of those concepts made a positive return but maybe they will work in 2019,” he said.