Copia Capital: The role of money market funds in volatile markets

Periods of market uncertainty often prompt investors to reassess how much cash they hold and where it is held. Diversified portfolios remain the primary driver of long-term returns, but ongoing volatility can lead clients to review how they manage capital held outside growth assets to meet their short-term needs.

The current global geopolitical tensions combined with uncertainty over the future direction of inflation and interest rates are a case in point. Research by Wesleyan suggests advisers expect volatility to remain a defining feature of markets in 2026, with 92% anticipating higher levels of turbulence, driven by global economic uncertainty, inflation and central bank policy decisions. In that context, it’s understandable that some investors might wish to hold some cash while they assess the outlook.

For many investors the traditional destination for that capital has been a bank account. However, the current interest rate environment has renewed interest in money market funds as a way of holding short-term capital while generating a yield that broadly tracks central bank policy rates. Moneyfacts analysis shows the average easy access rate fell to 2.41% in February, the lowest since July 2023.

Lessons from the financial crisis

Modern money market funds operate within strict rules governing the maturity, credit quality and liquidity of the securities they hold. However, they are sometimes misunderstood, with many misconceptions stemming from the global financial crisis. 

In 2008, a small number of funds in the United States experienced difficulties when the value of some underlying securities linked to subprime mortgages fell sharply. As these assets became difficult to trade, funds faced a mismatch between the short-term access to their money that investors expected and the liquidity of the underlying holdings. In a few cases this led to funds “breaking the buck”, meaning their value fell below the intended stable level.

Since then, regulation and market practice have evolved considerably. Money market funds are now subject to detailed rules covering liquidity buffers, maturity limits and credit quality. The focus is on maintaining stability and liquidity through short-dated, high-quality instruments.

At a basic level, money market funds lend money to high-quality borrowers for short periods through commercial paper, certificates of deposit and short dated floating rate notes. These are short-term loans to well-rated institutions such as banks, large corporations or government related bodies.

In practice, these instruments are very short dated. Some mature overnight, many mature within weeks, and most mature within three months. Regulations typically cap the maximum maturity at around one year. As securities mature, capital is returned to the fund and reinvested at prevailing interest rates. This continual turnover helps maintain liquidity while allowing the yield to adjust broadly in line with central bank policy rates.

How Copia approaches the asset class

At Copia, the Select Money Market Portfolio applies these same principles but spreads exposure across several actively managed money market funds selected by our investment team.

The portfolio is currently allocated across five established investment houses, including Fidelity, Royal London and BlackRock. Each manager invests in highly rated short-term instruments issued primarily within developed markets. The underlying securities are typically rated A1 to A3, which reflects the very high credit quality required within these strategies.

The maturity profile is intentionally conservative. Typically, between 80% and 95% of underlying holdings mature within three months, while no instrument extends beyond one year. The average maturity of the portfolio tends to sit around 45 days.

This structure allows the portfolio yield to move broadly in line with the Bank of England base rate. The current portfolio running yield is 4.42%, although this will change as interest rates move.

Money market funds are not designed to compete with growth assets over the long term. Instead, they provide a way of holding capital that may be needed soon while generating a yield linked to short-term interest rates.

A client who expects to need capital within the next twelve months, for example for school fees or a property purchase, may not wish to expose that money to equity market volatility. In that scenario, the Select Money Market Portfolio provides liquidity and a yield linked to prevailing interest rates. It is best viewed as a tool for short-term cash management rather than a long-term investment strategy.

Markets rarely move in straight lines and periods when stability and liquidity become more important are a normal part of investing. In those situations, money market funds can play a useful role as a temporary home for cash while clients assess short-term needs.

By Richard Warne, Senior Portfolio Manager, Copia Capital