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Under the Bonnet of Money Market Funds

Under the bonnet

With interest rates held at 0.5% for sixteen consecutive months, it is difficult for investors to earn good rates on cash, whilst managing credit risk. One option for retail investors is Money Market funds, offering diversified holdings of cash and other instruments. This article looks behind the money market performance tables to identify:

  • how funds have performed under low interest rates
  • reasons for good and bad performance
  • which funds are a true cash alternative
  • levels of diversification within funds

The table shows performance and other data for the top and bottom five funds ranked by one year performance. Average data, weighted by fund size, is shown for all funds disclosing the data. Institutional and offshore funds were excluded, leaving 27 funds to be analysed for performance, asset holdings and diversification.


All funds have produced positive returns over 3 and 5 year time horizons and only three have produced a negative return over the last year. However, on average, funds have failed to beat the base rate, except over the last year where an average return of 0.53% was achieved, three basis points more than the base rate. The top five performing funds are the only ones to have beaten the base rate. The median and modal returns are just 0.2%.

Cash and Non Cash Assets

On average, Money Market funds held around half their assets in cash with the rest being placed in asset backed securities, commercial paper, corporate bonds and Floating Rate Notes (FRNs). However, within funds there were some large differences in levels of cash holdings. The majority of funds (11) held high proportions of cash, whilst three funds had a fairly even split between cash and non-cash, leaving 5 funds with high proportions of non-cash assets. Funds including non-cash assets are likely to experience more volatile returns because these assets are valued at market value and are exposed to market risk. Reasons for changes in market value include changes in interest rates and changes in counterparty credit risk.


One of the benefits of investing in a money market fund is that the fund diversifies holdings across different counterparties thus helping to manage credit risk. The number of different holdings within funds varied from 3 to 92, with a median holding of 23. The average holding size was £5.8m. However, six funds had an average holding size under £1m, which is a difficult size to manage. Generally the smaller funds were the least diversified and these funds may struggle to attract investment.

Reasons for Good Performance

The top fund over one year was the M&G High Interest fund, which achieved a return of 4%, amazing at a 0.5% base rate. However, the reason for this good performance over a year is previous poor performance, with the fund now recovering its value. This is reflected in the cumulative three year return of 5.4%, equivalent to an annual return of 1.77%. This fund holds less than 10% cash, with the majority of the portfolio invested in FRNs and short dated corporate bonds, which could explain the rollercoaster performance. The fund invests 17.5% of its assets in lower quality investments (BBB rated or non-rated) and so these should provide higher returns than higher rated assets. The most consistent performer over one, three and five years is the Henderson Cash fund. This fund holds a high proportion of cash assets (over 86%) and benefits from low charges, with an annual management charge of 0.3%. It is one of the larger funds reviewed with £632m assets at 30th April 2010. The credit quality is good, with just under 70% of assets in the 'AA' category.

Reasons for Poor Performance

The five worst performers over a year were all zero or negative returns. The factors causing poor performance are difficult to identify, but include higher levels of charges than average and small fund sizes, making asset management more difficult. Having said this, two poor performing funds were over £90m in size.


The performance of money market funds has been lack lustre, with most funds failing to beat the base rate. Money Market funds can be an easy solution for diversifying cash holdings but the downside is poor performance and some non-cash holdings leading to volatile performance. Most retail investors can get a better cash return by investing directly in cash deposits but they will have to manage the credit risk themselves.

Table: Top and Bottom funds ranked by one year performance

Fund Name Cumulative Performance (Rank) AUM £m AMC % TER % Cash % Non-Cash % No of Holdings
1yr 3yr 5yr
1. M&G High Interest 4.0 (1) 5.4 (21) 13.4 (17) 263.0 0.50 0.65 9.4 90.6 92
2. Invesco Perpetual Money 1.8 (2) 8.6 (4) 15.7 (7) 59.1 0.50 0.72 46.4 53.6 27
3. Henderson Cash 0.9 (3) 9.5 (1) 17.3 (2) 632.1 0.30 0.36 86.3 13.7 nd
4. Premier UK Money Market 0.7 (4) 9.4 (2) 17.2 (3) 102.4 0.50 0.52 77.0 23.0 37
5. Henderson Money Market 0.7 (5) 7.9 (6) 15.3 (8) 12.2 0.50 0.52 100.0 0 15
23. L&G Cash 0.0 (23) 6.8 (14) 14.4 (14) 93.7 0.50 0.50 nd nd 23
24. Standard Life Investments Cash 0.0 (24) 5.9 (19) 12.9 (19) 15.5 0.50 0.65 88 12 18
25. Santander Money Market -0.1 (25) n/a n/a 98.4 0.50 0.67 nd nd nd
26. Thesis Optima Cash -0.2 (26) 7.2 (12) n/a 7.2 0.25 nd 99.5 0.5 14
27. NFU Mutual Deposit -0.2 (27) n/a n/a 9.4 0.50 nd nd nd nd
Average (weighted by AUM) 0.53 8.65 (2.80 pa) 17.2 (3.22 pa) 159.5 0.43 0.48 50.2 49.8 38
Number of Funds included 27 21 20 27 26 24 19 19 21
Cash return @ Base Rate 0.5 9.0 (2.90 pa) 19.6 (3.64 pa)
Data Sources: Fund performance data from Trust Net www.trustnet.com as at 7th June 2010, calculated on a bid price to bid price basis (mid to mid for OEICs) with net income (dividends) reinvested. Other fund data from Funds Library www.fundslibrary.co.uk and published Fund Fact sheets. Fund size data is latest available at 7th June 2010. Average data calculated by Askis Limited and weighted by assets under management.
Abbreviations: AUM = Assets Under Management, AMC = Annual Management Charge, TER = Total Expense Ratio. n/a = not applicable. nd= not disclosed.
Cash is defined as call accounts, certificates of deposit, fixed term deposits, UK gilts and UK treasury bonds. Non-cash is all other assets held by money market funds.


This website provides information only and cannot provide individual advice. If you are unsure about what products would be most suitable to meet your current needs you should speak to an Independent Financial Adviser (IFA), who may be able to help you decide but may charge for any advice given.
The links page includes contact details for several IFA associations.

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