A global fund manager has warned investors not to underestimate the value of holding cash, particularly when sovereign bonds are not offering very compelling incentives for individuals to make an allocation to them.
“There are plenty of periods where markets go into the area of negative returns; equity markets don’t always go up. If I get a 1.5 per cent return on a term deposit, that’s much better than minus 25 per cent,” Schroders head of fixed income and multi-asset Simon Doyle said.
In addition, Doyle pointed out holding cash has benefits irrespective of the defensive returns it has the ability to generate.
“Cash is liquid. What does liquid cash do? It gives you the ability to invest it when markets are moving around. So when you get volatility risk premium, you don’t have to sell something and then reinvest,” he said.
“If you’re getting volatility risk premium, it means prices are falling and investors will be losing money from that asset. With cash you’re holding value.”
He stressed investors should not be looking to hold too much cash either, but recognised it need not be replaced with an allocation to an equivalent asset class currently offering unattractive returns.
“Today, three-year government bonds is basically returning the same as cash and 10-year government bonds returns are not far from cash. So there is actually not a huge amount of incentive to hold sovereign bonds to replace cash,” he said.
He noted holding cash over other asset classes has to be a deliberate decision and repeated he would not downplay the benefits of holding cash strategically.