Why dollar-denominated money market funds have set Kenya abuzz

Is it for speculation or cushioning against inflation? This is the question around the recent fad by many investors to take up dollar-denominated money market funds (MMFs).

Kenyans are flocking around this class of MMFs, which has seen assets under management by fund managers double to Sh28.7 billion in just 12 months at the end of 2024.

In 2021, assets under management for US dollar-denominated MMFs were Sh4.5 billion, with the shilling exchanging at Sh109 against the greenback.

Today, the shilling is exchanging at Sh129 against the dollar compared to Sh160 in January 2024. Apart from spikes in the range of cents witnessed in February and last week, the shilling has remained fairly stable.

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The firms that shared their perspective with Financial Standard on the increased interest in dollar-denominated MMFs noted the need for clients to diversify their portfolios to hedge against inflation as the key driver for the trend.

However, Portfolio Manager at Britam Asset Managers Eric Karanja notes that the demand is partly associated with how the shilling performed in 2023 heading into 2024.

“Part of it could be speculation. But also in 2024, there are new products that were approved by the Capital Markets Authority (CMA),” he said.

He recalled the 2023 scenario where the market witnessed a 26.7 per cent depreciation of the shilling against the dollar, which led investors to start scouting for more stable and globally recognised currencies to protect their savings.

“There was growing awareness among investors about the benefits of dollar-denominated assets, further driving the uptake,” explained Mr Karanja.

As more Kenyans become aware of the challenges the country is facing, particularly concerning debt and the country’s ability to repay, a majority have become conscious of the value of the money they hold. The dollar has then become a better currency to not only store and preserve the value of the shillings they hold but also speculate, hoping to make a killing if things do not go as planned.

It was the case in June 2024 when the country was staring at a possible default on the $2 billion (Sh258 billion) Eurobond, then averaging Sh320 billion due to the exchange rate.

The government went to the market with a buyback plan for $1.5 billion (Sh240 billion), helping ease the pressure on the shilling.

Previously, President William Ruto also went for a government-to-government deal to access fuel through a six-month deferred credit plan. He said the plan would eliminate the demand for $500 million (Sh65 billion) every month from the market.

“Therefore, the people who work on numbers, I am giving them free advice, that those of you hoarding dollars might go into losses. You better do what you must do,” said President Ruto as he addressed investors in March 2023 during the listing of Laptrust’s Real Estate Investment Trust (REIT).

While the shilling is now arguably stable despite reservations by a section of experts on what is holding the currency in place, Kenyans are not willing to take chances.

Financial services companies, among them Britam Holdings, have had their dollar-denominated MMF products approved in the wake of these changes.

Britam Asset Managers Ltd was authorised in November 2024 to provide the Britam dollar MMF under the Britam Unit Trust Scheme.

“The fund is targeted at the investor seeking stable, low-risk returns denominated in USD,” said the Capital Markets Authority (CMA) on the authorisation.

CMA also approved the Orient Dollar Money Market Fund, a product of Orient Asset Managers Ltd, Jubilee USD MMF, CPF USD MMF, and Rencap USD MMF.

Orient Asset Managers Assistant Investment Manager Elvin Khama said the demand for USD-denominated MMFs is from two perspectives.

“There are investors who need to settle their payments in the dollar, making it a natural hedge with no need of an exchange, and there are Kenyans who are seeking to further diversify their portfolios, mitigating risks,” he said.

Mr Khama insisted that funds are not immune to volatility in the markets, despite the dollar MMFs being viewed as a stable option.

“However, they are managed in a structured way by fund managers who handle the risk and exposure of the portfolio allocation, ensuring that the capital of the investor is prudently managed, letting the dollar work for them, optimising returns and capital preservation for the investor,” he said.

But as the USD-denominated MMFs become popular despite Kenyans being aware of the risks of floating more Eurobonds to repay previous ones, US President Donald Trump’s economic policies seem to threaten the inflows of this global trading currency into the country.

The halting of USAID’s inflows and expected inflation in the US as other economies impose retaliatory tariffs pose a threat to how much Kenya receives in foreign exchange, which in turn may affect the USD MMFs. Mr Karanja, however, says while time will tell, these products will continue to thrive.

“When we look at the market, yes, there is some bit of outflow, but we also have a lot of capital coming in in sectors such as tech,” he said.

Mr Karanja said there are also large investors interested in upcoming mega projects, such as the extension of the Standard Gauge Railway (SGR).

“So, there is a lot of expected inflows into the market that will find their way into these products,” he said. “We expect a continued increase in appetite as investors seek to hedge against local currency risk and economic uncertainties.”