Consultants’ Corner: Your questions, answered – Liquidity+ deep-dive

Dear clients,

Moneyfarm was created to accompany you on your investment journey, to be by your side as you take care of your savings and invest them for your future goals. In order to be even closer to you, we have decided to launch this new section where we publicly address the most frequently asked questions that you pose to our consultants.

We’ll begin with all your questions about Liquidity+. In recent weeks, following the launch of this new solution for investing in the money markets, you have asked us many questions and provided us with many points for consideration. Here, we will try to provide answers without, of course, offering any personalised investment recommendations. To do that, we would need to thoroughly understand each of your situations, and in this case, we ask you to contact our advisory office. Our goal here is instead to clarify concrete, practical situations, answer specific questions, and provide all of you with potentially useful information and insights.

With our responses, we will aim to get straight to the point. A new way to be even closer to all of you.

Why should I invest in Liquidity+ rather than into my existing Moneyfarm portfolio?

With the introduction of Liquidity+ there is now a greater array of options at your disposal to help you save for both long- and short-term goals more effectively. As with any form of investment, having the most appropriate allocation in line with your objectives, needs, and tolerance or risk, is of paramount importance. 

Our more traditional offering of the model portfolios is managed with the intention of helping you achieve medium- or long-term objectives. Liquidity+, on the other hand, looks to capture the advantageous high interest environment for any plans that you may have coming up over the next couple years. 

Whether you’re looking at a house purchase, paying off the mortgage early, or simply putting aside any spare cash which you may hold in a current account, Liquidity+ offers a low-risk investment solution. The annualised yield, currently sitting above 5.3%*, closely follows the Bank of England’s base rate, so as interest rates rise, the expected annualised yield follows suit. Should rates fall, the expected yield falls in turn.

Often people have many different pursuits running at the same time, so naturally it’s reasonable to assume that you can still put money aside for any long-term objectives in the model portfolios whilst also earning a return on the more liquid part of your entire portfolio of assets. 

Why did you choose active mutual funds for Liquidity+ and not ETFs as you’ve always previously preferred?

Since the inception of Moneyfarm, we have solely used ETFs due to their transparency, low cost and innate broad diversification. Whilst this aligns strongly with the values of our company, it was also based on the idea that we will always offer the most appropriate investment solutions for our customers. With this in mind, there are three main reasons why we have opted for mutual funds ahead of ETFs on this occasion:

1. Liquidity

At the point in time where you need to use your funds, the advantage of mutual funds is that it shortens the time for you to hold active investments in the market and then for you to transfer the cash to your current account. As soon as you sell your holdings, it only takes an additional working day after the disposal of the assets for your cash to be ready for withdrawal, giving you greater flexibility.

      2. Cost

Due to the more active nature of mutual funds compared to ETFs, this can carry what’s called a ‘cash drag’ on the performance of your investments, whereby the higher fees eat into your earnings over many years. Money market mutual funds, like the ones used in Liquidity+, can be optimised and therefore run on lower costs which therefore can be passed onto you as the customer. For example, the underlying fund fee for Liquidity+ is an institutional rate of 0.10%, a price usually seen with ETFs, to which you should add only a 0.30% flat management fee.

     3. Risk/volatility

With the money market mutual funds included within Liquidity+, however, we can still capitalise on this high interest rate environment but carry significantly less volatility within the investments themselves. Through mutual funds we can target underlying investments in a given fund with a much shorter duration, like commercial papers, which is much more difficult to achieve with an ETF. On top of this, as the trade settlement period is shorter for money market mutual funds than it is for ETFs, you can significantly reduce the risk of a larger bid/ask spread in an illiquid market.

Why would I invest in Liquidity+ rather than using a savings account?

Compared to traditional savings accounts, Liquidity+ has an extensive range of uses which allows you to benefit from the high interest rate environment whilst also giving you greater flexibility and control over your finances. 

For example, you can contribute and withdraw whenever you’d like with no constraints in accessing your money. Savings accounts come in two forms: fixed term and easy access accounts. With the former, you are locked into that fixed rate of return for a predetermined period of time. Should you need to use your funds within this time period, as your money is tied up you may incur a penalty charge or a loss of interest earned. Even easy access accounts carry some risk in this respect, as Which? found that over half of the top 10 instant-access accounts impose limits on penalty-free withdrawals. With Liquidity+, however, there are no set timeframes for which you need to be invested. 

With this in mind, there are also no upper limits on how much you can invest in Liquidity+ (although HMRC annual allowances still apply). Some savings accounts have, for example, a £10,000 maximum where you get a high rate of interest up until that point before they revert you to a lower interest rate. Liquidity+’s yield is not static on the other hand. It moves with the markets and changes to monetary policy, so as the Bank of England’s base rate rises and plateaus, the product will capture this plus a small margin. 

Finally, you can use Liquidity+ in a very tax efficient way through the use of tax wrappers. Savings accounts are not shielded by tax once you go beyond your Personal Savings Allowance (PSA), which means that you will pay your marginal income tax rate. So even if you held Liquidity+ using a General Investment Account, you pay a lower rate of tax on the gains which you see via capital gains.

Can I use Liquidity+ for my Stocks and Shares ISA? 

Yes. One of the notable advantages of the Liquidity+ is that you can encase this style of investment in tax wrappers like ISAs. This means you won’t have to worry about any future tax liabilities, whilst still receiving a high yield on your investment. 

Indeed, the same is true for products like SIPPs or JISAs. If you are taking most or all of your pension in one go over the next couple of years, then no capital gains or dividends tax will apply to your investment as usual. There are of course tax implications once you take the income portion of your pension, but if there are any uncertainties on how you are affected by this then please reach out to one of our Investment Consultants.

Why should I invest in Liquidity+ rather than investing in a monetary ETF?

The key point to consider initially is that the counterparty risk of the fund provider will be significantly higher with an ETF as opposed to Liquidity+. Monetary ETFs are usually synthetic, meaning that they use financial engineering tools like swaps and derivative products instead of holding the physical asset in the fund. During times of market stress when people are looking to take their funds from the market, it can be more challenging to get your money back quickly as a result of using synthetic ETFs. With Liquidity+, however, the funds used hold the physical assets so it holds a remarkably more resilient safety net should you wish to sell and withdraw your funds. 

To coincide with this, there are regulatory factors to observe as well. After the financial crisis in 2008 there was a big shift to tighten regulation around many areas in financial markets, with money market funds coming under close examination. Fund providers must now offer a minimum percentage of the fund for investments which mature in days, thereby allowing a sufficient cash buffer should it be needed. A monetary ETF, conversely, offers no such guarantee.

Peter Rice:

* Based on the weighted average of the gross yields regularly published by the money markets funds held in Liquidity+, as of 17 November 2023.

Returns are sensitive to the Bank of England’s deposit rate fluctuations, with lower rates leading to lower yields and higher rates leading to higher yields.

As with all investing, your capital is at risk. Even though it’s a low-risk investment, this isn’t a cash product and there’s still a chance the value of your investments could fall and you might get less than you invested. Tax treatment depends on your individual circumstances and may be subject to change in the future.