How money market funds can beat your bank savings rate

Aberdeen Investments' Gordon Lowson, whose team manages abrdn Sterling Money Market fund, explains why money market funds deliver a return ahead of bank savings accounts, with yields generally slightly above the Bank of England interest rate.

13th May 2025 10:05

Sam Benstead from interactive investor

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 why they deliver a return ahead of bank savings accounts, with yields generally slightly above the Bank of England interest rate. He also talks about how secure they are and how they might behave in a market crash.

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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: Money market funds are cash-like instruments. But what value do you add as an active fund manager versus just leaving your money invested in a bank deposit account?

Gordon Lowson: If it's committed directly to a bank account, these funds outperform bank accounts in pretty much all circumstances. The reason for that is because typically a bank would be instant access and because of that it would be very closely linked to the overnight rate. That overnight rate, there would probably be some form of margin in there or fee in there for the bank as well. Whereas with a liquidity fund, because we can put our WAM (weighted average maturity) out to, for example, in this fund up to 180 days, we can go further along the curve and we can eek more value for that.

We can buy things, for example, like the floating rate product that I mentioned earlier, where you get a pick-up over the overnight rate. So, they're normally linked to SONIA, which is the overnight rates. So basically, because it's a pooled vehicle, you can just take slightly more risk, go slightly out of the curve, and outperform a bank account.

The other key thing to remember as well is that if you have your money in a bank account, you have a single-name risk with that bank, where if we're investing in a portfolio of high-quality banks, your credit profile is significantly better in a liquidity fund. In actual fact, most short-term liquidity funds, are actually AAA-rated by rating agencies to deflect the strength of the credit within the portfolio.

Sam Benstead: So, how many banks are you spreading the risk across then typically?

Gordon Lowson: Active names that we use on our credit list would probably be about 120 banks. In the portfolio at any one time, maybe 60 names, something of that nature. It varies time to time, but that would be typical.

Sam Benstead: What levers can you pull to increase returns during a rising interest rate environment and a falling interest rate environment?

Gordon Lowson: Typically, in a rate-rising environment, you would shorten your WAM, so you could get the pick-up of rates as they go up, and you're not waiting for the fund to reset at the higher letters, you're resetting quicker.

And vice versa, in a rate-cutting environment, you would typically lengthen your WAM to keep those longer rates in the portfolio for longer. However, if you think there are too many hikes or too many cuts priced in, that might not work as well if you like, so another way of removing that risk is to buy some floating product, which we've done recently and just basically crystallising that pick-up over the short-term rates.

What we've been doing recently in the fund as there's been a bit of volatility with, you know, markets are volatile just now, the outlook given all the trade tariffs, trade war stuff that's going on, has meant the outlook for interest rates has moved about a bit now as well.

So, what we've been doing is just opportunistically when we've seen rates spike up, buying some longer-dated assets and just holding it and when coming down, doing a bit more short-dated and a bit more of the floating stuff.

Sam Benstead: And this active approach means you can typically outperform what a bank offers and actually outperform the central bank or what the Bank of England interest rates?

Gordon Lowson: In almost all circumstances.

Sam Benstead: What are the risks associated with money market funds?

Gordon Lowson: Well, they're very low risk. I think it's important to understand that. The risk is, I guess, credit risk. You know, we have exposure to banks. But, again, if you were comparing it to other places you might put your cash, it's a much stronger credit profile than that. And we have, sitting behind it, our credit process, which I talked [about] earlier, which mitigates that risk to some degree.

And there's a small amount of interest rate risk. But the impact of that interest rate risk is really, on performance, a handful of basis points. It's not capital loss-type risk. It's more [that] you might underperform your peers by five or six basis points, maybe, but it's not a real risk to capital. So, to my mind, these funds are as close to risk-free as there is.

Gilts, or government debts, are often described as a risk-free asset, but as you know, if you're buying a long-term gilt, you can lose capital if the curve changes and all the rest of it. Whereas with these funds, they're designed to preserve capital, so they are very, very low risk.

Sam Benstead: The Bank of England has warned on liquidity during market events. So, is that a real risk? And what's been happening recently? We've just gone through Trump's tariff announcements, where equity markets have fallen a lot.

Gordon Lowson: Most public commentary around money market funds is really focused on short-term money market funds.

So, those short-term money market funds I described earlier are overwhelmingly the biggest part of the market in Europe. I think within the Money Market Fund Investment Association universe there's about £800 billion roughly just now in these money market funds.

These are the ones where we have seen corporates going in and out, and there's much more volatility. They tend to be where the focus is, not these pension-type, ISA-type funds that we're talking about today.

The concern is that when there's market turmoil, is there sufficient liquidity in these funds? Now, I've been in the market for 30 years, and I've worked in money market funds for 25 of those 30 years. So, I've gone through the financial crisis and various other crises, and these funds have typically behaved well through all that.

During Covid and the Liz Truss budget, when we saw a lot of volatility, these funds delivered their investment objectives. There were funds in 2008, during the financial crash, called Enhanced Money Market funds that had much more risk, so in comparison to the weighted average maturity of the funds we were talking about, they might have a weighted average maturity of two years or whatever, and they were buying more credit and they were buying more asset-backed type credit, and a lot of those funds suffered during that time and as a result of that there was quite a lot of regulation over the last decade on these money market funds to make them hold more liquidity.

So, I think some of the concerns that are sometimes expressed in the press and sometimes from regulators or central banks are overstated. I think these funds perform well in difficult circumstances.

Often the mistake that people make when they look at these funds is they think in terms of market stress, how would you cope with outflow? Well, the reality is in terms of market stress, people go into cash, they're not taking it out of cash. So, I think people sometimes lose sight of the reality of that, you know. To my mind, these funds are safe havens in terms of market stress as opposed to a systemic risk.

Sam Benstead: During the past week or so, we've seen Trump announce tariffs, equity markets down 20%, 25% in some cases. The money market funds, however, have just kept ticking up in value.

Gordon Lowson: You wouldn't know anything was going on to be honest. I think sometimes in the States, it's much more obvious in the States when it's risk-on and risk-off, you see money going into money market firms and then coming out. But because the overwhelming majority of investors in these money market funds are in the short-term money market funds, and are often corporates, it is not investment-style behaviour, it's more corporate-type behaviour, so it's different, so you don't see that to the same degree. So, our funds, you wouldn't know there was anything going on in the world.

Sam Benstead: One of the hidden risks with investing in cash-like products is inflation. What is your answer to the inflation risk that cash presents?

Gordon Lowson: So, there's not really anything you can do within the fund to address that. Given that central banks' primary tool for controlling inflation is central bank interest rates and the fact that these funds closely follow central bank interests rates, basically it's the central banks that do that inflation control for us because we're so closely linked to where the official rates are. So, we can't do much ourselves while managing the fund, but if the market is working efficiently, the central bank should be doing that and managing that inflation risk for us.

Sam Benstead: And why choose a money market fund over a bond fund?

Gordon Lowson: It's really just the fact that it's back to the preservation of capital point. The risk is so low within liquidity funds, there's a real predictability about return in these funds, and if you can predict the future of interest rates, you can pretty closely predict your return.

Because the risk of capital loss is so low, they're very, very steady. Clearly, you reduce risk in going into a short-term bond fund, but you still could lose capital, you still have more at risk, you still have more volatility than you would within a liquidity fund. So, it's basically just a spectrum, really, of risk, and you have your equities at one end and you have bonds going closer to the other end, and in cash is the extreme other end. It's just basically moving along that spectrum. So, short-term, short-duration bond funds can be a defensive play, but this is an even more defensive play.

Sam Benstead: And in the short-dated bond fund, if interest rates are falling, you might see some capital uplift there. In a money market fund, you wouldn't get that to the same extent?

Gordon Lowson: No, you would not.

Sam Benstead: How is the income distributed in your fund? Can it be paid out or is it reinvested?

Gordon Lowson: There are some that can accumulate, an accumulation fund that accumulates into the price or it can be distributed as income on a quarterly basis.

Sam Benstead: And finally, the question we ask all our guests, do you personally invest in your fund?

Gordon Lowson: Thankfully, I do. Given the market turmoil we're seeing at the moment, I'm glad to be in the fund. And I wish, to be honest, I had more of my portfolio in it.

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.

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