Cash funds will remain attractive if they yield 3% or more.
Money funds are one of the alternatives favored by the most conservative savers, along with bills and bank deposits, although conceptually they are designed to store liquidity and earn a return on it, rather than to invest all savings. In the first four months of the year alone, money funds raised more than €5.3 billion in Spain, after raising a further €5 billion in 2023. The key to their success was also their profitability. After several years in which these products remained unchanged or with small losses, they achieved returns close to 4% for the year. But the scenario has changed and the European Central Bank (ECB) has started cutting rates, meaning that bonds that already exist in the market will be revalued, but new issues will pay lower coupons. Despite this, experts agree that cash funds will remain attractive, with returns of 3% or higher this year.
Partly because Christine Lagarde, the ECB president, has already warned that the next cuts will be very “data-driven” and has insisted on the idea of not setting a road map: “We are not committing to going down a particular path with interest rates,” he warned. “Just because central banks have finally cut rates doesn’t mean they’re on autopilot. and future declines will depend primarily on confirmation of disinflation data. In this scenario this year, which is currently discounted by the ECB to two more cuts, Cash denominated in euros can still provide the client with a return of around 3–3.25% net for the entire year 2024.“, assesses Josep Maria Pon, Director of Fixed Income and Monetary Assets at Creand AM in Andorra.
Remember that this type of fund invests primarily in short-term government debt. They most often structure their portfolios around fixed income with an average duration of three months., although there are also ultra-short-term cash funds. So the biggest risk assumed by these funds is that one of the countries they invest in goes into default (i.e. defaults on its debt), which is unlikely since they typically buy bonds from countries like Germany, US or Spain. .
“The annual return will be similar to the base interest rate, which depending on fees will be around 3.5%-4%.”This is also said by Jordi Riera, CEO of Andbank AM and Paulina Fisch, also manager of the same company. “However, the market has already priced in this first decline, meaning that some of the rise in bond prices has already occurred. The direction and intensity of the following movements will be the focus of attention in the coming months. and will determine the dynamics of profitability. The big advantage of cash funds is that their reduced sensitivity to interest rates will allow them to cope with any expected solvency scenario,” they add.
They are also optimistic about Ofi Invest AM money funds, where they expect at least one more rate cut before the end of the year, and possibly two more. “This means that, based on two more cuts, the average for the rest of the year The expected return for this asset class will be around 3.65% (annualized) (2.07 from June 6 to the end of the year).. Given the very low risk profile of this type of investment, money market continues to be one of our favorite segments in the fixed income world,” they say.
So far, cash funds have achieved an average return of 1.6%, according to Morningstar data, after achieving returns of close to 4% last year. Some of the top earners available to individuals will earn up to 1.78% in 2024 (see chart).
Are there better alternatives to cash funds?
Despite the fall in the official price of money, experts agree that money funds continue to be a good alternative for investors with a more conservative profile, as attractive returns can be achieved. “In the current environment, we find investing in cash funds very attractive,” explains Ramon Sirach, portfolio manager at Arquia Gestión. “From a football point of view, we are now investing in The money fund is the same as a penalty from 11 meters and without a goalkeeper. A safe bet where we’re not going to make any mistakes.“, he illustrates.
The Andbank manager notes that from a financial perspective, a short-term cash fund or fixed income fund is probably one of the better alternatives. “They tend to be economic products with high diversification and great ability to offer liquidity. There may be other alternatives such as treasury bills, low volatility mutual funds or even rewards accounts. But in any of these cases there are certain characteristics that define this type of funds,” they point out.
Another alternative to cash funds could be time deposits, which offer up to 3.6% for one year in case of access to the offer of European banks available in Spain, “but in the current conditions with these products the profitability obtained is unlikely to exceed the amount of funds and these are assets with less liquidity because you cannot hold capital until maturity,” explains Arquia Gestion.
There are also those who think that a conservative investor must prepare his portfolio for a high inflation environment and to do this he must look beyond cash: “We expect this contraction cycle to be fairly mild with higher short-term interest rates compared to pre-pandemic levels as inflation remains more resilient,” said Mohammed Kazmi, portfolio manager and chief economist at the team. “As a result, investors should consider building portfolios for a higher inflation environment, which will likely force them to seek more returns outside of money market funds and ensure their returns remain significantly positive in real terms,” he elaborates. His proposal is based on distribution. part of the portfolio is allocated to high-quality short-term floating rate bonds. “We will then look to the highest yielding market segments, given the robust growth environment, to take advantage of carry,” he explains.