Kenya's money market fund strategy shift as yields decline amid falling interest rates

Kenya's money market funds (MMFs) have experienced a decline in yields following the Central Bank of Kenya's recent rate cuts. The interest rates have decreased from 13 percent at the beginning of the year to 12 percent in October 2024, marking the second consecutive reduction since the COVID-19 crisis. This reduction has impacted the performance of MMFs, affecting investor behavior and fund management strategies. Teddy Irungu, Research Analyst at Genghis Capital Asset Management, provided insights into how these changes are shaping the market and the broader economic outlook. The declining interest rates have led to softer returns on MMFs, with some funds showing a decrease in returns between 0.71 percent to 0.1 percent. However, not all funds have been equally affected, as some have recently enacted interest rate changes. Moving forward, as the rate environment continues to soften, yields are expected to further decline, given the Central Bank's anticipated continuous interest rate cuts. Despite the declining yields, investors have not yet shifted away from MMFs to other asset classes, as MMFs still offer relatively high returns with minimal risks in the Kenyan market. Retail investors are becoming more sensitive to yields, occasionally shifting between funds to lock in higher returns. On the other hand, institutional investors have shown little change in behavior due to the relatively steady decline in MMF yields. Fund managers are adjusting their strategies by lengthening maturity profiles and investing in longer-term bonds to secure yields over an extended period, particularly as credit default rates on government debt decrease. The regulatory and policy environment, including recent collective investment scheme policy implementations, is not expected to see significant changes soon. Economic factors like inflation, interest rate changes, and exchange rate volatility continue to influence MMF returns. The forecast for the sector indicates a further decline in yields but remaining higher than pre-pandemic levels, as most funds have integrated high-yielding bonds into their portfolios. Comparatively, Kenya's MMF sector is performing well regionally and globally, offering higher yields due to high local interest rates and credit risks. To enhance competitiveness, MMFs could improve fund expense ratios by reducing management fees for clients, ultimately attracting more investors and promoting growth in the market.