Sept 20 (Askume) – Investment advisers are urging clients to sell large cash allocations as the Federal Reserve begins its much-anticipated interest rate easing, a process they expect will limit the appeal of money market funds in the coming months.
According to the Investment Company Association, which represents investment funds, retail money market funds have attracted $951 billion in investments since the Federal Reserve began a rate hike cycle to curb inflation in 2022. As of September 18, their assets reached $2.6 trillion, an increase of about 80% since the beginning of 2022.
“As policy rates fall, money market funds will become less attractive,” said Daniel Morris, chief market strategist at BNP Paribas Asset Management.
On Wednesday, the US central bank cut the federal funds rate by 50 basis points from its usual range of 4.75% to 5%, making it less attractive to hold cash in deposit accounts and similar cash instruments.
“You have to change everything … to further increase the level of risk you accept,” said Jason Britton, founder of Reflection Asset Management in Charleston, which manages or oversees about $50 billion in assets. “Money market assets have to be converted into fixed income assets; fixed income has to be converted into preferred stock or dividend stock.”
Money market funds — ultra-low-risk mutual funds that invest in short-term Treasury bills and other cash proxies — are one way to gauge investor interest in the nearly risk-free returns they offer. When short-term interest rates rise, money market returns rise with them, making them more attractive to investors.
“Investors need to realize that if they’re counting on getting a certain level of income from this part of their portfolio, they may need to look at something different or longer term to lock in interest rates and not be exposed to the risk of the Fed lowering interest rates,” said Ross Mayfield, investment strategist at Baird Wealth.
Carol Schleiff, chief investment officer at BMO Family Office, expects investors to keep some cash on the sidelines waiting for opportunities to buy shares.
Analysts said it could take a week or more to see an initial reaction to Wednesday’s decision based on money market flows and other data. While the Investment Company Institute reported an overall drop in money market holdings in its report on Thursday last week, retail positions barely budged, and advisers said it would be difficult to persuade the group to abandon its cash holdings.
Christian Salomon, chief investment officer at Ballast Rock Private Wealth, said clients faced with low returns on cash are eager to invest in something else.
Still, Britton said, “investors are caught in a dilemma, facing the choice of investing in risky assets or earning lower returns from products such as cash”.
