A re-emergence of real returns from cash?

Now that the low-interest rate environment of recent years appears to be a thing of the past, money market funds are starting to see an uptick in real returns.

Cash has been oft-maligned as an asset class that fails to deliver a real return when accounting for inflation. However, this notion is very much based on more recent history (since 2009) and the environment created by rock-bottom interest rates post the Global Financial Crisis.

Looking at data from the creation of the IA Standard Money Market sector in 1989 paints a much more nuanced picture. For example, in the 20 years to the end of January 2009, money market funds (MMFs) delivered a relative return of +45% relative to UK CPI, equating to more than 2% per annum.

This is highlighted in the graph below.

Source: Morningstar Direct, as at 29 February 2024.

During that period, the UK interest rate average was 6.42%, not too far from today’s 5.25%. Stripping out the double-digit period of interest rates witnessed between the end of 1989 and 1991 brings that average down to 5.42%.

After 2009 came a decade-plus period characterised by hitherto unseen low interest rates compared to the inflation prevalent within the UK economy. This ate into the return potential of cash, as interest rates and equivalent short-term bond yields were unable to match – let alone beat – inflation. This caused the upsurge in the price of risk assets, particularly equities.

More recently, with interest rates back at more ‘normal’ levels and inflation down sharply, we have seen an uptick in the relative performance of MMFs compared to CPI come through in 2024 data. With cash having trended downward for so long, we could well be in for a period in which it can once again deliver decent real returns for investors, whilst also supplying its capital stability and drawdown mitigation strengths (the largest drawdown in the history of the sector is -0.5%) compared to equities and bonds. This is a positive in terms of allocations within client portfolios – of all risk types – in what remains an uncertain economic environment.


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Promotion approved 16/04/24