Money market funds are designed to provide a safe home for money that investors don't want to risk on the stock market. However, they are often inferior alternatives to holding cash in the bank. Legal & General's Cash Trust's (ISIN: GB0005141584) has particularly poor credentials.
It is the most expensive money market fund available to buy, with a chunky total expense ratio (TER) of 0.65 per cent. This is well above the average cost of 0.42 per cent for a fund of this type, according to Morningstar data.
The data also shows the fund is the worst performing cash fund over one, three and five years, and has consistently lost money over all these periods. Over five years to 30 June 2014, it lost 0.28 per cent. Its poor performance is likely to be down to its high fees, as other cash funds with lower TERs have tended to perform better. For example, the Marlborough Cash Trust (ISIN: GB0005071039) has a small TER of 0.23 but has managed to return 4.5 per cent over five years.
The Legal & General Cash Trust, which is £93m in size, invests 100 per cent of its assets in cash, but splits this between bank accounts all over the world. This spreads risk by holding money in different places, and means the fund manager can, in theory, hunt down the best rates.
The biggest holding is cash held with Lloyds Bank (8 per cent), followed by French bank Credit Agricole (7 per cent) and Japanese bank SMBC (6 per cent).
A spokesperson from L&G said: "The L&G Cash Trust follows a simple approach to cash management, designed to diversify risk across a large number of high-quality global counterparties. Unlike some, the fund invests only in cash. We apply strict limits on counterparty quality and the proportion of assets that it can hold in time deposits beyond two weeks. The aim is to balance the safety our clients need with returns from short-term cash deposits. Less conservative funds may achieve better returns, but could be prone to volatility in times of market stress.
"Over the past five years, we have been in an environment of ultra-low interest rates. This has proved to be a very challenging time for cautious cash funds to generate good returns from the asset class."
