19th May, 2023
Blog, DB News
DB Wood Money Market Portfolio
Since the turn of the year, we have been working on launching a new portfolio for short to medium term savings. We are delighted to introduce the DB Wood Money Market Portfolio which will officially launch on 1st June 2023.
Intrigued…? Let’s explain what this is and why we’ve launched it.
When you add money into a savings account with a bank, they typically either loan that money out to individuals or businesses in the form of mortgages or invest it to generate a return. As long as they earn more from those activities than they pay you in interest, it’s a profitable activity.
A large swathe of the investments they make are in cash-like securities, known as Money Market securities. These are very short in maturity, such as an overnight deposit with the Bank of England, or a 7-day loan to a large bank, and they pay interest.
Now money market funds have been around for a long time (since the 70s in fact) but in recent years they’ve been a bit lost. This is because they are purely interest instruments (they don’t move up or down like shares do for example), and their returns follow the interest rates which are set by the Central Bank. As we all know too well, in the 14 years between the financial crisis and the middle of last year, interest rates were close to 0%. Money Market funds therefore didn’t offer investors any return, and so were largely ignored.
Things have changed quite markedly in recent months though, and for the same reason you can receive 3% in most high-street savings accounts, money market funds suddenly have an important role to play again.
One of the key benefits vs a savings account is that they can be held in any tax-wrapper. You might be able to get 3% in a savings account, but that’s the ‘gross’ interest, leaving basic or higher rate taxpayers with 2.4% or 1.8% respectively once their savings allowance has been used. Money market funds can be held in ISAs, General Investment Accounts, Offshore Bonds and Pensions, allowing you not only to receive regular interest, but to do so in a tax-efficient way.
The returns are also slightly better than you get in most banks, because they aren’t taking a large slice in the middle. Businesses fair even worse, with rates typically sitting at sub 1% still. At the current time we estimate the interest return to be 3.5%-3.6% after all charges are considered. Moreover, you get full interest rate pass-through, meaning you don’t have to wait for your bank to pass the interest rate increase onto you, it will happen straight away.
Now, although they seem extremely similar on the surface, its important to also discuss the differences between a money market fund and a savings account.
A savings account in the UK is protected by the Financial Services Compensation Scheme (FSCS), meaning if you have up to £85k per person saved with a bank, and if that bank goes bust, your money is guaranteed to be recovered. This is not the case with money market funds, who are not covered by the FSCS.
For that reason, our investment team have spent a significant amount of time reviewing the investable universe of money market funds, and constructing a portfolio that is both high quality and heavily diversified. Our portfolio is spread across more than 100 banks/issuers, and concentrated in those which are ‘systemically important banks’ e.g. Lloyds, HSBC, Barclays etc. This means they are heavily regulated and in the highly unlikely event that they did go bust, we would expect the government to step in.
Overall, money market funds provide a very flexible way to generate cash-like returns. They can be held across any tax wrapper, for individuals and for business and charities, with current interest levels sitting at 3.5-3.6% after all costs. They are accessible (withdrawals take a maximum of 7 days), and we have built a portfolio of money market funds which aims to minimise any potential risks, no matter how unlikely.
We see this portfolio as an excellent complement to our actively managed multi asset portfolio’s. The income yield across this range is around 5% per annum, and in addition we think there are significant capital growth opportunities when inflation trends down this year. We therefore feel that our new portfolio sits well at the front end of your investment time line where you might need access to capital on a 1-to-3-year view in particular, allowing the balance of your portfolio to aim for capital growth as well as the attractive income yield.
As with any investment within our portfolio range, it’s important to talk to our planning team to ensure it is appropriate to your circumstances. If you want to learn more, please do not hesitate to get in touch.