“The main reason is simply that the more a relationship moves to an extreme end of its range, the more likely it becomes that it will begin to move back toward its longer-term average.”
A historically high level of assets in money market funds, which are a home for risk-averse investors, would generally indicate that investors are feeling cautious. But Becker argued that relative to equity fund assets, money markets are actually low.
Becker said that for asset level data he used the full history offered by Morningstar, which goes back to February 1993, covering 25 years of data. “This suggests that over the last 25 years investors have never felt more confident,” he says.
In this case, such a move could happen quickly or slowly. It could happen more slowly through changes in allocations of new money (e.g. investors decide to stop putting new 401[k] money into equity mutual funds and start putting it into MMFs). Or it could happen quickly through a sharp decline in the stock market, causing equity funds to and money-market fund assets to get larger relative to equity fund assets.
There is certainly a concern that we are late in the cycle but there is another reason why there is so little cash in money market funds compared with historical totals. They have not been paying any interest so why would anyone invest in them. That’s changing now with more than a few institutions and family offices I talk to moving cash into money market funds.Click HERE to subscribe to Fuller Treacy Money Back to top