Liquidity in Money Market Funds

The ongoing global pandemic continues to cause shock waves across global economies and the local Kenyan market has not been spared with various institutions such as the IMF, World Bank, and the Central Bank revising economic projections downwards. As a result of the pandemic, global investment trends has seen investors dispose of riskier assets in favor of safe havens, and therefore we look at money markets as an option for investors owing to their liquidity and low-risk advantage. Money Market Funds are conservative funds designed to serve the needs of investors whose primary goal is capital preservation, and who are willing to accept a modest return on their investment portfolio in return for more safety and liquidity. Therefore, to achieve this objective, Money Market Funds primarily invest in securities with short maturities and pose minimal investment risks such as fixed deposits, Government-issued securities, and commercial paper.  For Money Market Funds, liquidity refers to the extent to which a fund’s holdings can be sold for cash to meet near-term shareholder redemption requirements.

Owing to the nature of the asset classes money market funds invests in, the yields of money market funds will continue to remain relatively stable and largely unaffected. Favorable liquidity conditions will also persist following the drive by the Government as well as the industry players to discourage cash transactions in the economy in favor of mobile money transactions, card payments, and internet banking to reduce the risk of transmission of COVID-19 via hard currency. This directive has also seen financial industry players waive costs associated with the transfer of money between their mobile wallets and bank accounts. However, given the prevailing environment and movement of funds away from the equities market, towards investor perceived safe havens such as bank deposits, government instruments, and gold, we do not expect any changes in deposit rates, given that supply of funds towards the banking sector will not be affected, which can be demonstrated by the industry exposure to cash and fixed deposit securities and securities issued by the Government of Kenya which stood at 31.2% and 55.7%, respectively, bringing the combined exposure to 86.8% as at December 2019.

In addition, yields on government securities are expected to remain stable despite the cumulative 1.5% point cut on the Central Bank Rate (CBR) since the beginning of the year to the current 7.0%, with a bias to an upward readjustment in the yield curve. We believe that in the absence of credit risk, the main feature associated with Government-issued securities, the value of the cash flows accrued to such investors becomes a function of their required return based on inflation expectations, which presents a risk of effectively eroding the purchasing power of such securities future cash flows. With the expectations of heightened inflationary pressures, we believe that investors will continue demanding higher yields to compensate for the inflation risk, and based on the factors highlighted, yields on Money Market Funds will remain relatively stable, with a likelihood of going higher.

Liquidity is an important attribute for money market funds as it indicates the fund’s ability to meet short-term shareholder redemptions and with increased digitization and automation, liquidity in Money Market Funds is enhanced, with investors having immediate access to their funds in Money Market Funds such as the Cytonn Money Market Fund, regardless of whether they are withdrawing to their bank accounts or when withdrawing via M-Pesa while other Money Market Funds allow investors to access their funds within 3 to 5 working days if they are withdrawing to their bank accounts.  Also, as investors are fleeing to the Fixed Income market in light of current economic conditions, we believe that due to economies of scale, small investors are unable to do so and therefore Money Market Funds allows such investors to re-align their investments with their risk appetites by pooling money together and invest in safe havens.  Also noting that historically markets have shown an ability to bounce back from events that sparked volatility, we are of the view that the coronavirus pandemic will be no exception. Thus, it is important that investors remain calm even in the face of uncertainty.