Is there any meaningful difference between MMFs?

GeoffTF

Hoenir said:

GeoffTF said:

Hoenir said:

GeoffTF said:

There are $trillions invested in MMFs. If the yield curve reverts to normal, i.e. higher interest for locking up your money for longer period, that money could be pulled out rapidly. That would give a problem for the banks that are borrowing this money. Holding short term debt does not help much if the banks cannot pay. 

Investors hold the debt not the banks.  Those exiting the funds would suffer. As liquidatating the investments quickly  in the open market would be the challenge. Takes two parties to conduct a trade. 

Perhaps I have not been clear. The banks have borrowed $trillions from MMFs. This is short dated debt. The banks have come to rely on it. 

Which UK based MMF's are you referring too?  I'm not interested in the US as their banking system is regulated in a very different manner. 

The video conflates a number of different aspects to paint a misleading picture to those with a limited understanding. Pretty worthless. 

I clearly was not referring to any specific UK based MMF. They do not have $trillions invested in them. Nonetheless, there would be contagion from a US banking crisis - if it happened. I have been more polite about the video. You will not help anyone if you say the video is worthless without saying where it is wrong, let alone giving any evidence. For balance, here is someone who is more positive:

https://www.youtube.com/watch?v=Okv7EZL0dhc

I have already referenced the Monevator article which is more balanced. I held the RL fund when it was paying much more then the best savings accounts and sold when that was no longer true.

OldScientist

As @masonic says aove, the underlying composition is worth looking at. Taking the Vanguard MMF as an example, it currently (2 Feb 2024) holds 47% in UK treasury bills (which are as safe as UKplc, but illiquid over the short term), 25% in commercial paper (with credit ratings of at least A-1, but do have some default risk), 13% in time deposits (which are held with 4 banks, so presumably will suffer from some default risk), and 14% in cash (no idea where that is held!). I note the weighted average maturity is just over 37 days, with only 12% of the holdings have maturities of greater than 3 months. I guess these would represent upper limits on redemption if mass withdrawals occurred.

Assuming the cash and bills are fairly safe, this leaves about 40% of the MMF vulnerable to potential liquidity problems (but only if these are extremely widespread).

For those that have trouble sleeping, the FCA has commissioned a consultation exercise on MMFs (see https://www.fca.org.uk/publication/consultation/cp23-28.pdf ). Pargraph 1.5 suggest the reasons behind this consulation

"Investments in an MMF are, however, not guaranteed. MMFs offer daily redemptions on demand, often with same day settlement, despite many of the assets that they invest

in having a longer maturity and an illiquid secondary market. This creates a ‘liquidity mismatch’, with MMFs undertaking ‘liquidity transformation’ and can also lead to a first- mover advantage - an incentive for investors to redeem ahead of others."

dunstonh

again, beware of mixing up MMF with ST MMF.   Liquidity is a higher risk in MMF than STMMF.    I haven't watched the videos but it looks like the first one linked is talking about MMF rather than STMMF.

GeoffTF

Some of us looked at the daily price charts for the popular MMFs. They all had at least one down spike in the GFC or other financial crises. The ETFs were worse in that regard. The RL fund had the best record, but, of course, that may not be true in the future. Although not strictly an MMF, Ramin on Pensioncraft described ERNS as a very low risk fund. Nonetheless, I remember a post by someone who said they had got a lousy selling price with ERNS.

The historical record  shows MMFs losing few percent if you sold on the wrong day. The OEICS can be gated in a crisis (so that you cannot sell). The ETFs keep trading, but the selling price you get may not be good. It is not impossible that next crisis could be even worse than the GFC, so bigger losses are possible. That does not look likely, but these things never do until they happen. As always, there are doomsters saying that it will happen.

OldScientist

dunstonh said:

again, beware of mixing up MMF with ST MMF.   Liquidity is a higher risk in MMF than STMMF.    I haven't watched the videos but it looks like the first one linked is talking about MMF rather than STMMF.

Thanks for that... for the Vanguard fund, the KIID has the following statement

"This Fund is a short-term variable net asset value money market fund"

I've not looked, but this information may be available for the other funds/ETFs too.

Anyway, this can then be mapped against the descriptions at https://www.immfa.org/about-mmfs/investor-help.html  - if those still apply to the UK.

GeoffTF

OldScientist said:

Anyway, this can then be mapped against the descriptions at https://www.immfa.org/about-mmfs/investor-help.html  - if those still apply to the UK.

They do according to the Monevator article linked above, which is dated 21st February 2023. The Vanguard Sterling Short-Term Money Market Fund is a short-term VNAV money market fund according to the Prospectus. [Corrected.]

Qyburn

OldScientist said:

Thanks for that... for the Vanguard fund, the KIID has the following statement

"This Fund is a short-term variable net asset value money market fund"

I've not looked, but this information may be available for the other funds/ETFs too.

Royal London short term (GB00B3P2RZ52) .. 
"This Sub-Fund qualifies as a “Variable Net Asset Value Money Market Fund” in accordance with Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on Money Market Funds"