With government bonds, money market funds increasingly compete with bank savings

Money market funds, once a very popular form of investment funds that held 550 million euros in 2007, are increasingly coming back ‘in style’. This is evidenced by the statistics on the growth of their assets, as well as the fact that more and more are being established. At a recent meeting of the Croatian Financial Services Supervisory Agency (Hanfa), approval was granted for the establishment of two more money market funds: Erste Money Market USD, which will be exposed to the US money market instruments, and Raiffeisen Money Market.

In the Croatian fund industry, it is not common for a money market fund to be exposed to the US market, but Erste Asset Management (EAM) explains that they have a good reason for this. Tomislav Kolac, the director of the investment asset management department at EAM, claims that the assets of the Erste Money Market USD fund will be invested primarily in US Treasury bills and dollar deposits with the largest Croatian banks, which are of systemic importance for the euro area.

Very rare combination

– The mentioned market instruments currently offer a combination of attractive yields with very low risks, making it a unique offer both in the Croatian market and more broadly over a longer period. Historically, such a combination is very rare in the market. The US is the leading global economy with a high credit rating or credibility of public finances, and the high interest rate on dollar deposits makes investing in the money market fund even more attractive. We have enabled clients in Croatia, as well as more broadly in the region, to access this unique offer through the distribution channels of Erste Bank, and we believe that the offer will find its way to clients, especially compared to the interest rates that commercial banks offer on funds in current accounts or savings in US dollars. In Croatia, there is a larger number of clients who earn income in dollars (for example, shipping, the oil sector, and the increasingly strong ICT sector that are globally present). In this way, we enable them to participate in the financial market through a simple and favorable entry procedure into the product – emphasizes Kolac.

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Tomislav Kolac, director of the investment asset management department at Erste Asset Management

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When it comes to interest rates on savings in dollars, the information list of the Croatian National Bank indicates that the highest interest of 1.20 percent per annum for a 12-month term is offered by Partner Bank. In Addiko Bank, Istarska Kreditna Banka, and OTP Bank, it is possible to obtain one percent, 0.70 percent in Podravska Bank, and 0.65 percent in KentBank. Erste and Banka Kovanica offer 0.3 and 0.2 percent, respectively. In other banks (Agram, Croatia, J&T, Karlovačka, Privredna, and Samoborska Bank), it is possible to obtain from 0.10 to a symbolic 0.01 percent per annum.

Tomislav Kolac emphasizes that Erste Money Market USD is intended for short-term investment of excess funds and always offers current yields in the money market.

– We believe that it will also be attractive for investment over a somewhat longer period. Money market funds are investments in accordance with financial regulations, but in an investment sense, they are not considered a classic investment compared to investing in long-term securities (stocks or long-term bonds), so they should serve clients for better short-term management of their finances – says Kolac.

At Raiffeisen Invest, they state that they currently manage 14 funds that make the offer comprehensive in terms of covering all asset classes, from short-term bond funds, bond funds, mixed funds, to equity funds.

Listening to needs

– Along with the funds in the offer that are based on the concept of sustainable development and locally managed funds, some funds are feeder funds of main funds managed by the Austrian management company, which are offered to clients in Croatia, as well as in Austria, Italy, and Germany. Accordingly, we continuously monitor and listen to the needs of citizens, both existing and potential and future clients, and constantly adapt the offer. The launch of the money market fund is precisely the result of listening to client needs and exploiting market opportunities for our clients – state Raiffeisen Invest.

Statistics from Hanfa for April indicate that last month all types of UCITS funds had a negative average monthly return weighted by assets, except for money market funds, which achieved an average monthly return weighted by assets of 0.3 percent. Data from the Hrportfolio portal show that money market funds in the first part of 2024 recorded returns between 0.72 and 1.32 percent. When comparing the return achieved in less than six months with the interest rates on time deposits in euros, which range from 0.80 to 2.75 percent, it is logical that the net assets of money market funds are rapidly growing. At the end of April, it amounted to 278.6 million euros, surpassing mixed funds that manage 155.7 million euros. For comparison, at the end of last year, money market funds recorded net assets of 24.3 million euros.

Moreover, money market funds recorded the convincingly largest net inflow of all other investment funds in April. Namely, shares were issued for almost 77 million euros, and redeemed for 10.3 million, resulting in a net inflow of 66.6 million euros. A money market fund, but in the form of an exchange-traded fund (ETF) called 7CASH, is currently offered solely by InterCapital Asset Management (ICAM), which at this moment offers a net return (after fees, but before brokerage) of about 3.4 percent annually. – This return can, of course, change throughout the year as interest rates in the money market change. Most banks still do not offer deposit rates that would compete with this. However, as an interesting alternative, government bonds issued by the state have emerged. Depending on the maturity, these bonds currently provide a similar or slightly higher return but have lower liquidity – emphasizes Đivo Pulitika, fund manager at ICAM.

The best time is now

– Therefore, while banks do not offer (if they ever do) higher rates on deposits, the demand for money market funds and government bonds will likely only grow as more people become aware of the consequences of inflation and the need to somehow grow their savings. The decision between money market funds and government bonds should (besides the yield itself) also take liquidity into account. You can invest in money market funds for the term you want and exit any day. Government bonds have a maturity (after payment, you have to think about what to do with the money) and liquidity is not guaranteed. In other words, if you need the money earlier, it may be difficult to find a buyer or you will have to agree to a lower price. As for risk, the difference is not significant. Government bonds obviously carry the risk of Croatia alone, while the money market fund (in the case of our 7CASH) also invests in bonds of other eurozone countries with high credit ratings (e.g., France) and deposits in stable banks – says Pulitika.

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Đivo Pulitika, fund manager at InterCapital Asset Management

photo Rene Karaman

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According to him, future returns on money market funds (and new issues of government bonds) will primarily be a consequence of the behavior of central banks.

– At some point (perhaps already by the end of this year), the European Central Bank will likely partially lower rates, which will also lower the yields on such forms of investment. In other words, the best time to invest in money market funds and bonds, in over a decade, is most likely now – believes Pulitika. At Raiffeisen Invest, they say that in the conditions of high interest rates we are currently in, the potential of money market funds is great.

– In the six months since the launch, the share of money market funds has reached 10 percent of the total assets of UCITS funds. We expect that in the coming period, the share of assets in money market funds will further grow. Low volatility of share prices, high liquidity of invested funds, availability without entry and exit fees, and currently attractive yields in the money market are characteristics of this type of fund. Investing implies exposure to different asset classes, which is possible through a combination of different types of funds and creating a portfolio whose essential component, but not the only one, is certainly also the money market fund – say at Raiffeisen Invest.

The popularity of money market funds is also growing on a global level. According to data from the European Fund and Asset Management Association (EFAMA) for December last year, European investors currently hold more than 1.70 trillion euros in money market funds, which accounts for more than 13 percent of total assets at the European level, emphasizes Tomislav Kolac.