The Wall Street Journal makes the outrageous claim that, "All Money-Market Funds Have the Same Yield, Right? Not Even Close," which goes through a number of odd hoops to try and show that money funds have a wide disparity in returns. It says, "Money-market mutual funds were ignored by many investors over the past decade or so as their yields hovered near zero. That has changed since the Federal Reserve began to raise its benchmark interest rate in 2022 -- but there has been wide variance between the top and bottom funds." (Editor's Note: The article is ridiculous -- almost all money fund yields are currently clustered between 5.50% and 4.40%.)
The article explains, "Money-market funds invest in short-term debt instruments like three-month Treasury bills and repurchase agreements, or repos. These instruments are highly liquid, have low default risk and low interest-rate risk. And most important, their return usually follows the yield on the federal-funds rate, the central bank's short-term benchmark rate. But despite the perception that money-market funds are all investing in the same instruments and nearly identical, my research assistants (Sarmad Mirza and Yewon Choi) and I find significant differences between the top and bottom funds over the past year."
It says, "To study this issue, we pulled data on all dollar-denominated money-market funds listed in the U.S. We then looked at the annualized returns for these funds over a recent six-month span (June 2023 to November 2023), the past year (December 2022 to November 2023) and the 10 years before 2022. Within each of these time frames, we looked at the distribution of returns -- pulling out the minimum, the 10th percentile, the 25th percentile, the median, the 75th percentile, the 90th percentile and the maximum."
The piece adds, "In other words, if you made the mistake of not doing your homework on money-market funds back in the 2010s and picked a poor-performing one, you might have lost out on about 1 percentage point in returns in a given year. The cost of not doing your homework today: 5 percentage points."
In other news, the European Funds and Asset Management Association, published a press release entitled, "Households continue to keep a disproportionate amount of money in bank deposits in most European countries." It explains, "EFAMA published a report analysing the progress made in recent years by European households in recent years in allocating more of their financial wealth to capital market instruments (pension plans, life insurance, investment funds, debt securities and listed shares) and less in cash and bank deposits."
The release tells us, "Some key findings include: European households increased their holdings of cash and bank deposits from EUR 10,260 billion in 2015 to EUR 13,944 billion in 2022, or from 36.7% of their financial wealth to 41.1%. In parallel, the ratio between the capital market instruments and the cash and bank deposits held by households fell from 1.73 in 2015 to 1.43 in 2022. The massive increase of savings in deposits was driven by the pandemic in 2020 (EUR 1,054 billion) and the financial market downturn in 2022."
It continues, "Households increased their investments in capital markets to EUR 578 billion in 2021 and EUR 574 billion in 2022, compared to an annual average of EUR 303 billion in 2015-2019. However, the increase in bank deposits remained substantial: EUR 713 billion in 2021 and EUR 486 billion in 2022. There remain considerable differences in the way households allocate their savings across Europe. In Denmark, Sweden and the Netherlands, households hold less than 30% of their financial wealth in deposits. However, in 2022 the share of deposits exceeded 70% in Malta, Portugal, Lithuania, Bulgaria, Slovenia, Poland, Cyprus and Greece."
EFAMA writes, "There are five elements that explain the varied composition of household portfolio across Europe: The role of funded pensions in national pension systems; The extent to which households can expect a large State pension; The level of gross national income per capita; The level of financial literacy; and, The tax incentives available for investments."
They comment, "Some countries made more headway between 2020-2022 than others. Slovakia, Germany, Norway, Denmark, Luxembourg, Finland, Italy, Austria, Belgium, and the Czech Republic made the most progress. The fact that these countries are quite different in terms of total population, economic weight, and financial development confirms that progress toward greater participation in capital markets can be achieved in any country."
The release continues, "The report also makes several policy recommendations, including: Boosting access to, and coverage of, funded occupational and personal pensions, including: Developing pension tracking systems to inform citizens about what retirement income they can expect, Implementing mechanisms of auto-enrolment for occupational pension plans, Revising the Pan-European Personal Pension Product to allow the PEPP market to take off, Integrating the European Retirement Week into the EU official calendar to enhance awareness about the need to save more for retirement. Keeping access to affordable and quality financial advice for all EU citizens. This requires that the Retail Investment Strategy preserves the existing distribution system for investment products which allows EU citizens to have access to affordable and quality financial advice no matter the size of their investment."
EFAMA Senior Director Bernard Delbecque comments, "If Member States want to foster retail investments in capital markets in a meaningful way, their priority should be to create the right conditions for EU citizens to save more for their pensions. By pursuing this approach in a determined way, Member States would adequately respond to the triple challenge of reducing pension inadequacy risks, advancing the Capital Markets Union, and mobilizing an important source of capital for the European economy to take up the sustainability challenge."
EFAMA Director General Tanguy van de Werve <p:>v_ adds, "`Our report shows that decisive actions are needed at European and national level to encourage more Europeans to become long term investors. The Commission's Retail Investment Strategy should ensure that European investors have access to affordable and quality advice, that the digital distribution of investment products is facilitated and that disclosures are understandable and decision useful. Also, we encourage regulators to stress the benefits of investing instead of putting off people by constantly focusing on costs and risks, especially as costs are overall decreasing and risks can be diversified away and generate higher real returns."
