abrdn's Lowson on MMFs vs. Banks
A U.K. publication, Interactive Investor, published, "How money market funds can beat your bank savings rate," which explains, "Aberdeen Investments' Gordon Lowson, whose team manages abrdn Sterling Money Market fund, explains why money market funds deliver a return ahead of bank savings accounts, with yields generally slightly above the Bank of England interest rate." Lowson says in the interview, "If it's committed directly to a bank account, these funds outperform bank accounts in pretty much all circumstances. The reason for that is because typically a bank would be instant access and because of that it would be very closely linked to the overnight rate. That overnight rate, there would probably be some form of margin in there or fee in there for the bank as well. Whereas with a liquidity fund, because we can put our WAM (weighted average maturity) out to, for example, in this fund up to 180 days, we can go further along the curve and we can eek more value for that." He comments, "We can buy things, for example, like the floating rate product that I mentioned earlier, where you get a pick-up over the overnight rate. So, they're normally linked to SONIA, which is the overnight rates. So basically, because it's a pooled vehicle, you can just take slightly more risk, go slightly out of the curve, and outperform a bank account. The other key thing to remember as well is that if you have your money in a bank account, you have a single-name risk with that bank, where if we're investing in a portfolio of high-quality banks, your credit profile is significantly better in a liquidity fund. In actual fact, most short-term liquidity funds, are actually AAA-rated by rating agencies to deflect the strength of the credit within the portfolio." Lowson adds, "Often the mistake that people make when they look at these funds is they think in terms of market stress, how would you cope with outflow? Well, the reality is in terms of market stress, people go into cash, they're not taking it out of cash. So, I think people sometimes lose sight of the reality of that, you know. To my mind, these funds are safe havens in terms of market stress as opposed to a systemic risk."
