By Suzanne McGee and Carolina Mandl
(Reuters) – Investment advisers are urging clients to divest from their large cash allocations now that the Federal Reserve has begun its long-awaited easing of interest rates, a process they expect will limit the appeal of money market funds in the coming months.
Retail money market funds have attracted $951 billion in inflows since 2022, when the Federal Reserve began its rate-hiking cycle to tame inflation, according to the Investment Company Institute, which represents mutual funds. Their assets totaled $2.6 trillion as of Sept. 18, up about 80% from the start of 2022.
“As policy rates fall, the attractiveness of money market funds will diminish,” said Daniel Morris, chief market strategist at BNP Paribas Asset Management.
The U.S. central bank on Wednesday cut the federal funds rate by a larger-than-usual 50 basis points to a range of 4.75% to 5%, making holding cash in deposit accounts and cash-like instruments less attractive.
“We're going to have to move everything … up a notch in terms of the amount of risk we accept,” said Jason Britton, founder of Charleston-based Reflection Asset Management, which manages or oversees about $5 billion in assets. “Money market assets will have to be converted into fixed-income investments; fixed income will move into preferred stocks or dividend-paying stocks.”
Money market funds — ultra-low-risk mutual funds that invest in short-term Treasury securities and other instruments that represent cash — are one way to gauge investor appetite for the near-risk-free returns they offer. When short-term interest rates rise, money market yields rise with them, increasing their attractiveness to investors.
“Investors need to be aware that if they have a certain level of income from that portion of their portfolio, they may need to look at something different, or longer-term, to lock in rates and not be as exposed to the Federal Reserve lowering interest rates,” said Ross Mayfield, investment strategist at Baird Wealth.
Carol Schleif, chief investment officer at BMO Family Office, expects investors to keep some cash on the sidelines to wait for opportunities to buy stocks.
Analysts note that initial reactions to Wednesday’s Fed decision could take a week or more to be reflected in money market fund flows and other data. While the Investment Company Institute reported an overall decline in money market holdings in its latest weekly report on Thursday, retail positions were little changed and up, and advisers said it has been difficult to persuade that group to give up its cash holdings.
Christian Salomone, chief investment officer at Ballast Rock Private Wealth, said clients facing lower cash returns are eager to invest elsewhere.
Still, “investors are caught between a rock and a hard place,” Britton said, faced with the choice between investing in riskier assets or earning lower returns on cash-like products.
(Reporting by Suzanne McGee and Carolina Mandl; additional reporting by Davide Barbuscia; editing by Megan Davies and Rod Nickel)
