The lure of cash

Thursday 27 April, 2023

In Summary

• Flows into money market funds have increased dramatically as interest rates are at multi-year highs
• The mix of near instant liquidity and attractive yields offers a compelling combination
• Whilst useful in the short-term money market funds are not a long-term solution for investors looking to maintain the real value of their portfolio

Financial markets have been turbulent ever since inflation started showing signs of being more entrenched than first feared in early 2022. Whilst they have rebounded, the recent mini-banking crisis has only served to increase talk of recession resulting in a rather uncertain outlook. When bonds and equities were correlated during the worst of the volatility last year, the one saving grace has been cash due to higher rates. 

So, why are investors opting for cash?

Economic and geopolitical uncertainty is elevated and investors, following a difficult 2022, are wondering whether they are better off sitting in cash waiting for more attractive opportunities. Hence, flows into money market funds and cash accounts have increased markedly. Often, savers opt to lock away cash for six month or 12-month periods to enhance the savings interest. LGT Wealth Management prefer using money market funds as they not only yield 4% (currently), but also allow us the flexibility to access this cash with 24 hour notice should we want to take advantage of an investment opportunity. Our vehicle of choice is the BlackRock ICS Sterling Liquidity Fund, which is currently yielding just over 4%[1], and is available for us to access on most platforms. We believe this mix of near instant liquidity and attractive yield offers a compelling combination.

Within the money market funds, the deposits are highly regulated and are invested in short term liquid assets. These typically include short-term government debt, which are safer than large bank deposits and are not very sensitive to interest rate fluctuations. Like bank deposits, when interest rates begin to decline, yields on these cash funds will also come off. 

Given that some cash accounts and money market funds are offering attractive nominal returns relative to recent history, what are the merits of investing into the stock market at this moment in time?

The merits of investing in the stock market

For investors genuinely seeking capital appreciation in line with or above inflation, investing in cash funds is not an appropriate long-term strategy. Whilst a 4% savings rate may appear attractive today, you would be prioritising short-term safety over longer term opportunities. You are also focused on income and could potentially miss out on capital appreciation. In summary, cash delivers lower returns when compared to equity markets in the long run, and risk assets provide far more potential in terms of beating inflation. 

Remaining invested 

The pace at which markets react to news means that when markets turn, they can turn quickly. Those trying to time their entry and exit may actually miss the market bounce. History has constantly remined us that ‘time in the market’ is more effective and beneficial that trying to ‘time the market’.

For LGT Wealth Management, utilising risk assets such as equities for capital appreciation, whilst having cash positions alongside our alternatives to mitigate volatility, are how we strategically navigate these periods of volatility. Therefore, we are using Blackrock Liquidity to dampen short-term volatility and looking for the opportunities to deploy that cash once they arise. We don’t view cash accounts or money market funds as a long-term solution for investors looking to grow their savings. 

[1] - Factset

Risk warning

This communication is issued and approved by Lonsdale Services Ltd. It is based on its understanding of events at the time of the relevant preparation and analysis. The information and opinions contained in this document are provided by Lonsdale and are subject to change without notice and should not be relied upon when making investment decisions. The value of your investments and the income from them may go down as well as up and neither is guaranteed. Investors could get back less than they invested. Past performance is not a reliable indicatorof future results. 

Changes in exchange rates may have an adverse effect on the value of an investment. Changes in interest rates may also impact the value of fixed income investments. 

The value of your investment may beimpacted if the issuers of underlying fixed income holdings default,
or market perceptions of their credit risk change.There are additional risks associated with investments in emerging or developing markets. The information in this document does not constitute advice, nor a recommendation, and investment decisions should not be made on the basis of it. The material provided should not be released or otherwise disclosed to any third party without prior consent from Lonsdale.

 

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