Everything you need to know about money market funds

Sam Benstead sits down with Aberdeen Investments’ Gordon Lowson to discuss how money market funds work. Lowson, whose team manages the abrdn Sterling Money Market fund, explains what money market instruments are, how much his fund yields, and also goes into detail about the risks and opportunities. 

He makes the case for using money market funds over holding cash in bank accounts. 

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Sam Benstead, fixed income lead, interactive investor: Hello, and welcome to the latest Insider Interview. Our guest today is Gordon Lowson, global head of liquidity at Aberdeen, where his team manage the abrdn Sterling Money Market fund. Gordon, thanks very much for coming to the studio.

Gordon Lowson, global head of liquidity at Aberdeen: Thank you for having me.

Sam Benstead: So, we've seen money market funds surge in popularity, but can you explain what they are and what role they have in portfolios?

Gordon Lowson: Yes, so money market funds are different from other investment vehicles, primarily because their primary investment objective is preservation of capital. So, they're designed to be low risk and straightforward, simple products which behave in a cash-like manner.

Typically, a fund, in terms of its yield, would follow that of the central bank of the currency in which it's based. The commonality across all types of money market funds is that they buy short-dated debt instruments, primarily from financial institutions, but always at an investment grade.

They typically have a relatively short way to average maturity, which means that they don't have great interest rate sensitivity. And because they're buying the best credit and because they've got quite short duration, they don't really have much credit exposure either, in reality. So, because they're the highest credit quality and because they are short duration, they're not particularly sensitive to big moves in the credit curve.

They track base rate very, very closely, are very low risk and [have] quite predictable behaviour and quite predictable returns.

Within the sphere of money markets, there are different types of money market funds. They're short-term money market funds, which are primarily used by asset management companies to manage their cash. Corporates, local authorities, charities, things like that. These are T-0 funds, so people can get money in and out of the fund on a daily basis. Essentially, these investors use it as almost like an interest-bearing current account type thing, a bank account.

Because of that, these are more tightly regulated and they would have to hold a minimum of 10% maturing in the overnight and 30% in the week. In reality, most funds like that would be holding 20-25% in overnight and maybe up to 40% maturing in a week. If you think about how investors use that, an asset manager would sweep money from all its other investment funds, which could be hundreds or thousands of funds, on a daily basis in and out to make sure that the cash holdings of equity or bond funds aren't causing a drag on performance because they're getting a reasonable return.

Somebody like a corporate, a retailer, for example, might have cash being generated on a daily basis that they're pushing into the fund and then at the end of the month pay bills and wages, so they take the money back out. Local authorities and charities might park money in the fund for a period of time and then use it as they require it. So, they're using it very much like a bank account and it's all about managing cash flows.

So, there's more volatility in flow in these funds. There's more money coming in and out on a daily basis. The T-0 nature of that lends itself to that. The structure of these funds also lends themselves to that.

Whereas the fund we're talking about today, the abrdn Sterling Money Market fund, it's more aimed at investors. It's more of an investment fund, and we regard that as a standard money market fund rather than a short-term money market fund. So, not quite as tightly regulated.

You can have 7.5% maturing in the overnight and 15% in the week. The investors in this fund would typically be people managing pension money, ISA money or just, say, general savings. Because there's much less volatility in terms of money going in and out and the NAV of these funds tends to be more stable, you can go slightly further out of the curve, have a slightly longer WAM (weighted average maturity) and the short-term money market funds I talked about earlier, their maximum WAM of the entire portfolio is 60 days. 

In this fund, it would be 180 days. Still very short, still very low risk, but just a little bit more flex. So, you would typically expect a standard money market fund like this to outperform the short-term money market fund by up to five to 10 basis points, something of that order. For people who have taken that longer-term view, there isn't really materially different risk profile for them, they're looking at it there.So, that's why it lends itself to that kind of savings type market.

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Sam Benstead: So, you buy money market instruments, but what exactly are they?

Gordon Lowson: I would describe a money market instrument as a debt instrument with less than 397 days (until maturity). That typically could be from the shortest being an overnight deposit, term deposits, commercial paper, which are basically just debt instruments issued by financial institutions and corporates, certificates of deposit, which act very similarly to commercial paper, and again with a duration of less than one year.

And then there's reverse repo, which is basically when you give cash and you receive gilts of security against that cash and any short-dated bond which may be coming to its final year before maturity, so basically short-term debt instruments typically issued by financial institutions and occasionally by corporates.

Sam Benstead: And how is your portfolio invested today in money market instruments?

Gordon Lowson: There are different types of money market funds and they have different rules that apply to them. The fund that we are talking about today, the abrdn Sterling Money Market Fund, is classed as a standard money market fund. There's a requirement to have a minimum of 7.5% of the assets maturing on a daily basis and 15% within a week. So, typically we have the fund positioned where we have some capacity in excess of that. We would typically have 15% to 20% of the fund maturing on any given day, and between 20% and 25% maturing within that week.

How we then try to attract some yield to the fund is by doing some longer-dated assets. The weighted average maturity of the portfolio has to be within 180 days, so we do have scope to go out to buy assets [with] one-year maturity, that type of thing.

What we do is we try to, when we see yields pick up and we think there's value in the curve, we'll lengthen that way to have maturity and we'll try to buy some of that yield. If we're trying to reduce the interest rate risk within the fund, we might buy more floating rate product. So, we can buy like floating commercial paper (CP) or floating certificates of deposit (CDs).

At the moment, because we're in this kind of rate-cutting cycle, that's what we're doing. So, we have about 30% of the fund on that floating basis, which gives us pick-up over the short-dated rates, but doesn't give us that interest rate risk.

Sam Benstead: And what kind of bond, then, is high quality enough to earn a place in the portfolio?

Gordon Lowson: Investment grade. Our credit process is quite important to how we manage these funds. We have minimum raising requirements, we need investment grade. But we also do a full credit analysis of every counterparty that we lend to - and that's an independent process from the portfolio management.

If we want to invest, for example, in a bank, what we would do is we would apply for a credit limit from our credit committee for that bank. We then leverage our broader fixed income franchise, which would do a full analysis of that bank, it would go to the credit committee and only if the credit committee think there's a negligible risk of loss from that counterparty would we then be applied a limit, and then we would be able to use that bank in the portfolio.

Sam Benstead: You said that money market fund yields closely track the Bank of England base rate. What is the yield on your fund today?

Gordon Lowson: As of yesterday (7 April 2025), 4.7% was the daily yield, and the annual total return was around 5.07%. And it is tracking down. What you tend to find is in a rate-cutting environment, because the WAM of the fund will be maybe 60, even 70 days, it does take a period of time before the rate of the fund falls to that of the central bank. So, money market funds tend to outperform overnight deposits and the central bank in a rate-cutting environment and slightly lag it in a rate-rising environment.

Sam Benstead: It's a very effective way of holding a cash-like product inside an investment wrapper.

Gordon Lowson: Absolutely, and there are different types of money market funds that are used by different types of investors, and to pick up on that point, short-dated money market funds, which are slightly different to the fund we're talking about today, where you have same-day access to these funds, are essentially used by asset managers like Aberdeen, large corporates, charities, and local authorities, as an interest-bearing bank account, although they're a fund and they're not a bank account.

They have certain characteristics that lend themselves to that: the T-0 nature of the fund and also how it's structured. They have to hold more liquidity, so rather than 7.5% in the overnight they have to have 10% and within a week they have 30% because there's much more money going in and out of those funds.

If you take a retailer, for example, they might have cash coming in every day that they're putting into the fund and then at the end of the month they might have to pay bills, wages, that type of thing, and you see money going out. Local authorities might park cash until they have a need to use it, same with charities.

Asset managers like Aberdeen, pretty much all our peers, sweep on a daily basis from thousands of investment funds just to small cash holdings that they all have into these funds so they're not a drag on performance and they're earning an interest rate. So because of that, you have money going in and out on a daily basis, so these short-term funds are more tightly regulated, they have to hold more liquidity because of the nature of how they're used.

Whereas the fund we're talking about today is much more of an investment fund aimed pensions, ISAs, savings, that type of thing, where people are going to park it there for a week, two, three, you know, a month. Maybe they're taking risk off in their portfolio and they just want to park their cash somewhere and still receive an attractive interest rate. So, because of that, they can take a little bit more risk. They can have a slightly longer weighted average maturity. You don't have to have quite so much in the overnight category because there just isn't the same flow volatility.

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Sam Benstead: Can you invest in overseas assets and what do you do with any currency risk that might lead to?

Gordon Lowson: Yes and no. We can invest in overseas assets in that we can invest in sterling-denominated debt from foreign banks. However, you wouldn't buy anything other than the base currency of this fund, because these funds are designed to, as I said, preserve capital. They're designed to be low risk. They're designed to be simple and straightforward. So, bringing in currency risk and any kind of risk that comes associated with that wouldn't be appropriate.

Sam Benstead: And how closely are yields linked to the Bank of England interest rates? What happens if yields are rising and what happens if yields are falling?

Gordon Lowson: So, it would depend on the weighted average maturity of the fund at the time. It would also depend on flows, because you would more quickly catch up if you have inflow. You would more slowly catch up if there were outflow. But typically, maybe two months, something of that order. But it definitely depends on how you're positioned basically.

Sam Benstead: Gordon, thanks very much for coming into the studio.

Gordon Lowson: Thank you.

Sam Benstead: And that's all we've got time for today. You can check out more Insider Interviews on our YouTube channel, where you can like, comment, and subscribe. See you next time.