RLAM Short Term Money Market: a fund for a rainy day

The Royal London Short Term Money Market Fund was launched November 1999 and has assets under management of about GBP5.7bn.

Money market funds will never be the most exciting funds on offer, but they’re not designed to be exciting or high-returning. Instead, they are a strategic investment, and designed to allow investors to save in a fund that gives some returns, is liquid and very low risk.

They are very useful if saving towards a specific objective – such as for a deposit for a house, or for a wedding, or a once-in-a-lifetime holiday – and should have an investment term of three-to-five years. You really don’t want to be putting the money you’ve been saving for your eldest daughter’s wedding in the stock market…

A fund for specific and strategic use

They are also a good halfway house for holding capital that has been withdrawn from the stock market due to recent volatility and drip-feeding capital back into equities as the market recovers.

Currently money market fund yields are on the rise, due to the Bank of England’s campaign of raising interest rates to counter rising inflation.

With ease of access, low volatility, the ability to earn something on your saving and low costs, they are part of the investment armoury to be deployed as and whenever necessary.

Royal London’s Short Term Money Market fund’s investment objective is to preserve capital and provide an income over rolling 12-month periods by investing at least 80% in cash and cash equivalents.

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The fund’s performance target is to outperform, after the deduction of charges, the Bank of England Sterling Overnight Interbank Average (SONIA) over rolling 12-month periods. This is the average overnight interest rate UK banks pay for unsecured transactions in sterling and is considered an appropriate benchmark for the fund’s performance.

In addition to the benchmark for the fund’s performance, the IA Short Term Money Market sector is considered an appropriate benchmark for performance comparison.

The fund is managed by Tony Cole and Craig Inches who have both been co-managing the fund since the beginning of 2016. The fund is a sub-fund of the Royal London Bond Funds ICVC, an open-ended investment company with variable capital with segregated liability between sub-funds, incorporated in England and Wales. It is available in accumulation and income units and on all your favourite platforms.

Royal London Short Term Money Market Fund is a low cost fund

In terms of charges, there is no initial fee and an ongoing fund management fee of 0.1% on both unit classes. Although it is a money market fund, investing in a mix of cash, cash-equivalents, bonds and derivatives, it is not totally risk-free.

As with all investment the value and income derived from them can go down as well as up and an investor might not get back all they put in, and specific to money market funds there is credit risk – should a borrower not be able to make repayments their credit rating will fall, and the value of that investment will fall. However, fixed income securities that have a lower credit rating can pay a higher level of income but have an increased risk of default.

The use of derivates to manage portfolios in the most efficient way is also not without risk, as although designed to reduce risk, sometimes derivatives can expose an investor to greater risk and price volatility.

Moreover, interest rate risk is very prescient in this market. Fixed interest securities are particularly affected by trends in interest rates and inflation. If interest rates go up, the value of capital may fall, and vice versa. Inflation will also decrease the real value of capital. Where the income yield is lower than the rate of inflation, the real value of an investment will reduce over time.

Less volatility in money market funds

That said, money market funds should be less volatile and less risky than almost any other option apart from deposits and literally give you a little bang for your bucks over locking your cash away in a term deposit.

The fund has consistently been top-quartile in its peer group in terms of performance over the last five years and level-pegging the SONIA benchmark. In the last three months (to end-July) the fund offered a 1.2% return, the same as SONIA and 20 basis points ahead of the per group median. Over one-year Royal London offered a 3.5% return against 3.4% for the index and 3% for the peer group. Over three years the fund was 0.1% behind SONIA, returning 3.8% but 0.7% ahead of its peers. Over five years you would have got a 5.1% return from the fund – the same as SONIA – but 1.2% ahead of the sector average.

Cole said in a recent commentary: “With no Bank of England meeting in July, attention was on economic data and its potential to change the direction of UK monetary policy. Inflation, at both headline and core CPI surprised the market with lower than-expected readings, although both wage growth and retail sales remained strong. As a result, the market has tempered its forecast of the peak in rates, with markets now pricing in a peak of 5.75% – lower than before but still higher than current levels.”

He continued: “The lack of central bank changes meant that SONIA remined at 4.93% over the month, while ICE Term SONIA three-month rates edged higher from 5.27% to 5.40%. Two-year gilts, often seen as a proxy for market expectations of BoE rates, dipped from 5.26% to 4.98%, reflecting the market view that rates may start to come down next year.”

The fund focused its activity in overnight deposits and Credit Default Swaps (CDs), where the fund managers were seeking opportunities to add attractively priced floating rate CDs, including six-month paper from Nordea and one-year notes from Bank of Montreal.

Inches commented: “Given the uncertainty in interest rate outlook, our focus in traditional CDs remains in the three-month area, and we added to KBC and Crédit Agricole during the month. Finally we added one year senior floating rate notes from National Bank of Canada at a healthy premium to SONIA.”

The fund was split between covered bonds at 9.8%, Gilts (UK Government Bonds) at 11.1% and Money Market Instruments at 79.1%. The fund’s Top Five Holdings were:

Royal London Short Term Money Market Fund top five holdings

Source: RLAM, end of July 2023

Overall, the Royal London Short Term Money Market Fund is a low-risk investment option that can provide a stable income. It’s never going to be exciting, but it is what it is and one of the best-in-class money market funds on the market currently.