By Suzanne McGee and Carolina Mandl
(Reuters) – Investment advisers are urging clients to dump hefty cash allocations now that the Federal Reserve has begun its much-anticipated interest-rate easing, a process they expect to limit the appeal of money-market funds in the coming months.
Retail money-market funds have attracted $951 billion in inflows since 2022, when the Fed started its rate-hiking cycle to tame inflation, according to the Investment Company Institute, which represents investment funds. Their assets stood at $2.6 trillion on Sept. 18, roughly 80% higher than at the beginning of 2022.
“As policy rates fall, the appeal of money-market funds will wane,” said Daniel Morris, chief market strategist at BNP Paribas Asset Management.
On Wednesday, the U.S. central bank cut the federal funds rate by a larger-than-usual 50 basis points to a range of 4.75% to 5%, which makes holding cash in deposit accounts and cash-like instruments less appealing.
“You’re going to have to shift everything … further up in the amount of risk you’re accepting,” said Jason Britton, Charleston-based founder of Reflection Asset Management, who manages or oversees around $5 billion in assets. “Money-market assets will have to become fixed-income holdings; fixed income will move into preferred stocks or dividend-paying stocks.”
Money-market funds – ultra low-risk mutual funds that invest in short-term Treasury securities and other cash proxies – are a way to gauge investor interest in the nearly risk-free returns they offer. When short-term interest rates climb, money-market returns rise with them, increasing their appeal to investors.
“Investors need to be aware that if they’re counting on a certain level of income from that portion of their portfolio, they may need to look at something different, or longer-term, to lock in rates and not be as exposed to the Fed lowering interest rates,” said Ross Mayfield, investment strategist at Baird Wealth.
Carol Schleif, chief investment officer of BMO Family Office, expects investors to keep some cash on the sidelines to wait for opportunities to buy stocks.
It could take a week or more for initial reactions to the Fed’s decision on Wednesday to show up in money-market fund flows and other data, analysts note. While the Investment Company Institute reported an overall decline in money-market holdings in its last weekly report on Thursday, retail positions were little changed to higher and advisers said it has been tough to persuade that group to abandon their cash holdings.
Christian Salomone, chief investment officer of Ballast Rock Private Wealth, said clients faced with lower returns on cash are eager to invest in something else.
Still, “investors are stuck between a rock and a hard place,” Britton said, faced with a choice between investing in riskier assets or earning a smaller return from cash-like products.
(Reporting by Suzanne McGee and Carolina Mandl; additional reporting by Davide Barbuscia; editing by Megan Davies and Rod Nickel)
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