While recent turbulence in the U.S. banking system has led many Americans to rely on cash once again, professional investors have not joined the trend.
Despite the surge of individual investors into money market funds in the past few weeks, professional fund managers have kept their portfolio cash allocations largely unchanged.
This contrast emphasizes the presence of distinct motives.
Individuals turn to cash mainly to protect their wealth, while fund managers’ cash allocations in their portfolios typically reflect their predictions for the market’s future performance, as well as their investment goals, which prompt them to limit their cash exposure.
Nevertheless, it has resulted in a significant discrepancy.
As of Wednesday, the assets of U.S. money market funds reached $5.3 trillion, rising by $354 billion or 7% in just three weeks.
The recent surge in U.S. money market funds has occurred as a result of concerns over the potential extent of unrealized losses at regional U.S. banks. These concerns have prompted substantial deposit withdrawals, which resulted in the mid-March collapse of two U.S. banks, namely Silicon Valley Bank and Signature Bank of New York.
In response to these events, the Federal Reserve provided funding to the banking system while the federal government insured all deposits at the two banks. Notably, this insurance was not limited to the $250,000 that the Federal Deposit Insurance Corp. (FDIC) guarantees for individual accounts.
It is worth noting that the rise in money market funds has primarily resulted from the shifting of cash rather than a complete switch to it. As banking turmoil continues, bank deposits in the U.S. have declined for the first time since 1948, with withdrawals accelerating in recent times. For instance, in the week following the onset of banking turbulence, U.S. banks outside the top 25 lenders lost $185 billion in deposits, which is the largest decline in one week since 1973.
Amid these circumstances, cash continues to play a vital role in retirement allocation. According to a report by Schroders plc, individuals aged 45 years and above hold an average of 29% of their retirement funds in cash. Meanwhile, working millennials have placed 33% of their retirement funds in cash, which is the highest among all asset classes.
In contrast to individual investors, professional fund managers have had an average of 5.5% of their assets in cash, according to the latest BofA Securities Global Fund Survey. This figure is lower than the 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. However, the cash levels of fund managers increased in March, and they remain higher than the historical average of 4.7%.
Fund managers aim to remain fully invested in the investment style that they manage, and as such, their cash levels typically do not exceed 5% of their fund allocation. Nevertheless, many fund agreements with investors allow funds to increase their cash levels significantly during periods of market uncertainty or stress to ensure they can meet redemption requests.
While the recent banking system turmoil could have qualified as such a period, fund managers generally have not responded that way. This is likely due to the fact that fund managers are typically more focused on their future market assessments and objectives to limit their cash exposure, rather than safeguarding assets.
It is worth noting that fund managers’ average cash levels are lower than much of last year, when the Federal Reserve repeatedly raised interest rates, increasing economic and market uncertainty.