Money Market Funds Amass Cash Amid Banking System Turmoil

Professional investors, however, keep cash levels relatively stable

Cash and Current Assets on the Balance Sheet

Don Farrall / Getty Images

For many Americans. recent turmoil in the U.S. banking system once again has made cash their king. But professional investors have not followed the march of the masses.

While individual investors have piled into money market funds in recent weeks, portfolio cash allocations of professional fund managers remain relatively stable.

The contrast, of course, highlights differing motivations.

Individuals flee to cash primarily to safeguard their assets. Fund managers' portfolio cash allocations, meanwhile, typically reflect their future market assessments -- and fund objectives encouraging them to limit their cash exposure.

Nonetheless, it has produced a stark disparity.

U.S. money market funds totaled $5.3 trillion in assets as of Wednesday, an increase of 7% -- or $354 billion -- in just three weeks.

The increase coincided with rising fears regarding the scope of unrealized losses at regional U.S. banks. Those worries led to massive deposit withdrawals that caused the mid-March failure of two U.S. banks, Silicon Valley Bank and New York-based Signature Bank.

The Federal Reserve responded by providing funding to the banking system, and the federal government insured all deposits at the two banks -- not just the $250,000 for individual accounts guaranteed by the Federal Deposit Insurance Corp. (FDIC).

The influx into money market funds essentially represents more of a shifting of cash than a switch to it.

U.S. bank deposits declined last year for the first time since 1948, and withdrawals have accelerated in the wake of the banking turmoil. In the week after the turmoil surfaced, U.S. banks outside the largest 25 lenders lost $185 billion in deposits -- the most in one week since 1973.

The shift to money market funds has occurred as cash remains a key retirement allocation.

According to a report this week from Schroders plc, workers aged 45 and older have an average of 29% of their retirement funds in cash. Working millennials have 33% of their retirement funds in cash -- more than any other asset class.

Professional fund managers, on the other hand, had an average of 5.5% of their assets in cash in the latest BofA Securities Global Fund Survey. That compares with 5.9% during the onset of the Covid-19 pandemic, 5.4% during the global financial crisis and 8% during the Dotcom bust of 2000-2001.

Fund managers' cash levels increased their cash levels in March for the first time in six months, and they remain higher than the historical average of 4.7%.

However, average fund cash levels remain lower than much of last year, when the Federal Reserve's repeated interest rate hikes increased economic and market uncertainty.

Of course, fund managers typically desire to remain "fully invested" in the investment style they manage. Depending on the investment fund, they typically agree to maintain cash as no more than 5% of their fund allocation.

However, many fund agreements with investors allow funds to increase their cash levels dramatically during periods of market stress or uncertainty, partly to ensure they can meet redemption requests.

The banking system uncertainty of the past few could could qualify as such a period, but fund managers generally haven't treated it that way.

At least not yet.

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