📨 Have you signed up to the Forum's new Email Digest yet? Get a selection of trending threads sent straight to your inbox daily, weekly or monthly!

Royal London Short Term Money Market Fund Y Acc

Options
2

Comments

  • GeoffTF
    GeoffTF Posts: 2,059 Forumite
    1,000 Posts Third Anniversary Photogenic Name Dropper
    masonic said:
    What GeoffTF said. Imagine you have an equity portfolio packed full of tech stocks and other growth assets, but instead of the wild ride and growth potential of that, you want to match the gentle incline of SONIA. So you approach an investment bank that is always on the look-out for ways in which to make more money and they agree to pay you a return linked to SONIA in exchange for them benefitting from the returns of the racy portfolio you are holding. All good providing that agreement holds up and both parties remain solvent. So why hold all those risky investments when all you want to do is match SONIA? Well, probably you are just trying to make the portfolio as attractive as possible to your counterparties.
    Let us compare this with just lending the funds money to those big banks. If we do that and the big banks go 100% bust, we lose our money. If we enter into a swap with those big banks and they go bust we still have the equity portfolio, and perhaps some more protection paid for by the greedy banks who would rather have the equity return. We cannot easily say which option is the more risky. The risks are different, but they should be very low in both cases.
  • masonic
    masonic Posts: 27,353 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    GeoffTF said:
    masonic said:
    What GeoffTF said. Imagine you have an equity portfolio packed full of tech stocks and other growth assets, but instead of the wild ride and growth potential of that, you want to match the gentle incline of SONIA. So you approach an investment bank that is always on the look-out for ways in which to make more money and they agree to pay you a return linked to SONIA in exchange for them benefitting from the returns of the racy portfolio you are holding. All good providing that agreement holds up and both parties remain solvent. So why hold all those risky investments when all you want to do is match SONIA? Well, probably you are just trying to make the portfolio as attractive as possible to your counterparties.
    Let us compare this with just lending the funds money to those big banks. If we do that and the big banks go 100% bust, we lose our money. If we enter into a swap with those big banks and they go bust we still have the equity portfolio, and perhaps some more protection paid for by the greedy banks who would rather have the equity return. We cannot easily say which option is the more risky. The risks are different, but they should be very low in both cases.
    In the case of a bank going bust, we lose our money and collect FSCS compensation. In the case of CSH2 failing, we have to hope the assets remaining and any insurance the fund manager put in place will be sufficient to repay us.
  • Albermarle
    Albermarle Posts: 28,040 Forumite
    10,000 Posts Seventh Anniversary Name Dropper
    The traditional pension providers/insurers, have their own cash like funds ( Scottish Widows, Standard Life etc)
    I presume they are more like the RL model and I presume in theory at least you are 100% covered for compensation?
  • masonic
    masonic Posts: 27,353 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    The traditional pension providers/insurers, have their own cash like funds ( Scottish Widows, Standard Life etc)
    I presume they are more like the RL model and I presume in theory at least you are 100% covered for compensation?
    I believe those come in a couple of varieties, one is an insured fund which is 100% covered without limit, the other is more along the lines of a UK open-ended fund where the normal £85k limit applies.
  • GeoffTF
    GeoffTF Posts: 2,059 Forumite
    1,000 Posts Third Anniversary Photogenic Name Dropper
    masonic said:
    GeoffTF said:
    masonic said:
    What GeoffTF said. Imagine you have an equity portfolio packed full of tech stocks and other growth assets, but instead of the wild ride and growth potential of that, you want to match the gentle incline of SONIA. So you approach an investment bank that is always on the look-out for ways in which to make more money and they agree to pay you a return linked to SONIA in exchange for them benefitting from the returns of the racy portfolio you are holding. All good providing that agreement holds up and both parties remain solvent. So why hold all those risky investments when all you want to do is match SONIA? Well, probably you are just trying to make the portfolio as attractive as possible to your counterparties.
    Let us compare this with just lending the funds money to those big banks. If we do that and the big banks go 100% bust, we lose our money. If we enter into a swap with those big banks and they go bust we still have the equity portfolio, and perhaps some more protection paid for by the greedy banks who would rather have the equity return. We cannot easily say which option is the more risky. The risks are different, but they should be very low in both cases.
    In the case of a bank going bust, we lose our money and collect FSCS compensation. In the case of CSH2 failing, we have to hope the assets remaining and any insurance the fund manager put in place will be sufficient to repay us.
    Perhaps I have not been clear here. My two options were the fund lending money to the banks, and the fund holding equities and entering into swap contracts with those banks. The fund cannot claim FSCS compensation if its bank deposits go kaput. As I said, it is not clear that the swap option is the more risky of the two.
    We have the option of depositing money in a UK bank protected by the FSCS. That is clearly less risky than using any money market fund. Short dated gilts also have less default risk, but have some interest rate risk. I used a money market fund when the base rate was high, the banks were paying miserly interest rates, and we had a heavily inverted yield curve. I am not using them now.
  • masonic
    masonic Posts: 27,353 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    edited 16 May at 6:31PM
    GeoffTF said:
    masonic said:
    GeoffTF said:
    masonic said:
    What GeoffTF said. Imagine you have an equity portfolio packed full of tech stocks and other growth assets, but instead of the wild ride and growth potential of that, you want to match the gentle incline of SONIA. So you approach an investment bank that is always on the look-out for ways in which to make more money and they agree to pay you a return linked to SONIA in exchange for them benefitting from the returns of the racy portfolio you are holding. All good providing that agreement holds up and both parties remain solvent. So why hold all those risky investments when all you want to do is match SONIA? Well, probably you are just trying to make the portfolio as attractive as possible to your counterparties.
    Let us compare this with just lending the funds money to those big banks. If we do that and the big banks go 100% bust, we lose our money. If we enter into a swap with those big banks and they go bust we still have the equity portfolio, and perhaps some more protection paid for by the greedy banks who would rather have the equity return. We cannot easily say which option is the more risky. The risks are different, but they should be very low in both cases.
    In the case of a bank going bust, we lose our money and collect FSCS compensation. In the case of CSH2 failing, we have to hope the assets remaining and any insurance the fund manager put in place will be sufficient to repay us.
    Perhaps I have not been clear here. My two options were the fund lending money to the banks, and the fund holding equities and entering into swap contracts with those banks. The fund cannot claim FSCS compensation if its bank deposits go kaput. As I said, it is not clear that the swap option is the more risky of the two.
    We have the option of depositing money in a UK bank protected by the FSCS. That is clearly less risky than using any money market fund. Short dated gilts also have less default risk, but have some interest rate risk. I used a money market fund when the base rate was high, the banks were paying miserly interest rates, and we had a heavily inverted yield curve. I am not using them now.
    Do any money market funds put investor capital in bank deposit accounts to earn interest? I didn't think that was a thing. It seems more risky than holding ultra-short high credit quality bonds, which I believe is what most non-synthetic funds do.
    Edit: I see a few CDs in the RLSTMM fund holdings, so I guess they do at least feature in the mix.
  • GeoffTF
    GeoffTF Posts: 2,059 Forumite
    1,000 Posts Third Anniversary Photogenic Name Dropper
    edited 16 May at 6:43PM
    The traditional pension providers/insurers, have their own cash like funds ( Scottish Widows, Standard Life etc)
    I presume they are more like the RL model and I presume in theory at least you are 100% covered for compensation?
    Unless it is self invested, it is up to them where they invest your money, within the fund's remit. If it invests your in money market funds and those money market funds lose money, you will not be compensated for that. The RL fund is allowed to use derivatives.
  • GeoffTF
    GeoffTF Posts: 2,059 Forumite
    1,000 Posts Third Anniversary Photogenic Name Dropper
    edited 16 May at 8:40PM
    masonic said:
    GeoffTF said:
    masonic said:
    GeoffTF said:
    masonic said:
    What GeoffTF said. Imagine you have an equity portfolio packed full of tech stocks and other growth assets, but instead of the wild ride and growth potential of that, you want to match the gentle incline of SONIA. So you approach an investment bank that is always on the look-out for ways in which to make more money and they agree to pay you a return linked to SONIA in exchange for them benefitting from the returns of the racy portfolio you are holding. All good providing that agreement holds up and both parties remain solvent. So why hold all those risky investments when all you want to do is match SONIA? Well, probably you are just trying to make the portfolio as attractive as possible to your counterparties.
    Let us compare this with just lending the funds money to those big banks. If we do that and the big banks go 100% bust, we lose our money. If we enter into a swap with those big banks and they go bust we still have the equity portfolio, and perhaps some more protection paid for by the greedy banks who would rather have the equity return. We cannot easily say which option is the more risky. The risks are different, but they should be very low in both cases.
    In the case of a bank going bust, we lose our money and collect FSCS compensation. In the case of CSH2 failing, we have to hope the assets remaining and any insurance the fund manager put in place will be sufficient to repay us.
    Perhaps I have not been clear here. My two options were the fund lending money to the banks, and the fund holding equities and entering into swap contracts with those banks. The fund cannot claim FSCS compensation if its bank deposits go kaput. As I said, it is not clear that the swap option is the more risky of the two.
    We have the option of depositing money in a UK bank protected by the FSCS. That is clearly less risky than using any money market fund. Short dated gilts also have less default risk, but have some interest rate risk. I used a money market fund when the base rate was high, the banks were paying miserly interest rates, and we had a heavily inverted yield curve. I am not using them now.
    Do any money market funds put investor capital in bank deposit accounts to earn interest? I didn't think that was a thing. It seems more risky than holding ultra-short high credit quality bonds, which I believe is what most non-synthetic funds do.
    Edit: I see a few CDs in the RLSTMM fund holdings, so I guess they do at least feature in the mix.
    According to the data on HL, the investments are:
    Non-Classified  61.49%
    Bonds  35.06%
    Cash and Equiv.  3.45%
    So, only a minority is invested in bonds. The Vanguard fund appeared more conservative than RL when I looked. None of these funds is a substitute for a cash account though.
  • masonic
    masonic Posts: 27,353 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    edited 16 May at 8:55PM
    Non-Classified is always a mysterious one though. I'd originally eyed the Cash and Equiv. being very low and not looked much deeper, but it looks like deposits are not included in cash.
    For the Vanguard fund, it's 42% "UK Treasury bills" and 15% "UK Commercial paper", with a third "Time deposit" and the remaining 9% cash.
    Not something I have looked at too deeply before because I had a strong incentive to hold an ETF and was comfortable with the risk of CSH2 when I'd otherwise be investing in longer duration government bonds (and indeed have been shifting back into these, but that's still in progress).
  • GeoffTF
    GeoffTF Posts: 2,059 Forumite
    1,000 Posts Third Anniversary Photogenic Name Dropper
    masonic said:
    Non-Classified is always a mysterious one though. I'd originally eyed the Cash and Equiv. being very low and not looked much deeper, but it looks like deposits are not included in cash.
    For the Vanguard fund, it's 42% "UK Treasury bills" and 15% "UK Commercial paper", with a third "Time deposit" and the remaining 9% cash.
    Not something I have looked at too deeply before because I had a strong incentive to hold an ETF and was comfortable with the risk of CSH2 when I'd otherwise be investing in longer duration government bonds (and indeed have been shifting back into these, but that's still in progress).
    Vanguard looks more pedestrian, and that was reflected in a lower return when I looked at these things. The important points here are that there is always counterparty risk. Some counterparties are riskier than others. With swaps, you have collateral to offset that risk. CSH2 looks a bit racy. It lends out its stock and uses just about every trick in the book. RL is a bigger fund with lots of institutional investors (who pay a much lower OCF), but it uses financial engineering too. RL has performed well in previous financial crises. The other funds that I looked at had some nasty price spikes. You should be able to avoid those with an ETF, if you are a savvy investor.
Meet your Ambassadors

🚀 Getting Started

Hi new member!

Our Getting Started Guide will help you get the most out of the Forum

Categories

  • All Categories
  • 351.2K Banking & Borrowing
  • 253.2K Reduce Debt & Boost Income
  • 453.7K Spending & Discounts
  • 244.2K Work, Benefits & Business
  • 599.2K Mortgages, Homes & Bills
  • 177K Life & Family
  • 257.6K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 16.2K Discuss & Feedback
  • 37.6K Read-Only Boards

Is this how you want to be seen?

We see you are using a default avatar. It takes only a few seconds to pick a picture.