Royal London Short Term Money Market Fund

One of the best-sellers on Fidelity Personal Investing in September was the Royal London Short Term Money Market Fund, which is a low-risk option that offers a steady source of income. These types of vehicles have grown in popularity as interest rates have risen, with some of the yields now well in excess of inflation.

The fund aims to preserve capital and provide an income by investing at least 80% in cash and cash equivalents. Its benchmark is the Bank of England Sterling Overnight Interbank Average (SONIA), which it aims to outperform over rolling 12-month periods.¹

Attractive real return

SONIA is based on actual transactions and reflects the average interest rate that banks pay to borrow sterling overnight from other financial institutions. For a couple of years it hovered around 0.05%, but from the end of 2021 it climbed steadily to a peak of 5.2%, before falling back to 4.95% after the Bank of England cut interest rates in August.²

If the Central Bank reduces interest rates again then SONIA would fall further, yet it is currently almost three times the level of UK CPI inflation, which was 1.7% in the 12 months to the end of September. This means that for the time being, the Royal London Short Term Money Market fund offers an attractive real return.³

Where does it invest?

Around 85% of the portfolio is invested in cash and cash instruments, with the remainder divided between Treasury bills and covered bonds. The sterling-denominated securities come from a range of developed markets and all have a high credit rating, making it less likely that they would default on their obligations.⁴

It is an extremely liquid fund with more than a quarter of the assets having a duration of just one day and the weighted average maturity at the end of August being 53 days. The main focus is on short-term paper, but it can also invest in longer dated securities when they offer decent value.⁵

What are the manager’s latest views?

Writing in their quarterly update at the end of June, the managers said that although the next move in rates was expected to be a cut, the timing of that move was unclear.

“Across our strategies, we aim to mitigate this risk partly by taking selective exposure to longer maturity assets, but also through floating rate exposure where available at attractive rates. These lock in an additional spread over SONIA and provide protection in both a rising and falling rate environment.”⁶

Attractive income

The fund currently has an attractive distribution yield of 5.13%, with the income paid twice a year. This would be tax-free when held in an ISA or SIPP.⁷ Please note this yield is not guaranteed.

Over the five years to the end of August, the Royal London Short Term Money Market fund generated an annualised return of 2.03%. The reason that this looks low is because interest rates were virtually zero for much of the period, yet it has still beaten the SONIA benchmark and is a top quartile performer in its peer group.⁸

How do the costs stack up?

As you would expect, the cost of a fund like this is very low with ongoing charges of just 0.1%.

Past performance is not a reliable indicator of future returns.
Source: Morningstar from 30.9.19 to 30.9.24. Basis: bid to bid with income reinvested in GBP. Excludes initial charge.

More on Royal London Short Term Money Market Fund

Source:

^1,4,5,8 Royal London Short Term Money Market Fund monthly factsheet, 31 August 2024
² Bank of England, August 2024
³ ONS, October 2024
⁶ Royal London Short Term Money Market Fund Quarterly Investment Report, June 2024
⁷ Fidelity International, October 2024

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. The value of shares may be adversely affected by insolvency or other financial difficulties affecting any institution in which the fund's cash has been deposited. An investment in a money market fund is different from an investment in deposits, as the principal invested in a money market fund is capable of fluctuation. An investment in a money market fund is not guaranteed. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.