Cash and cash products proved to be a safe haven during the global financial crisis (GFC), but now advisers are looking for the catalyst to drive that cash back into other asset classes. Krystine Lumanta reports.
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The high level of surplus cash sitting in client portfolios reflects continued uncertainty created by the global financial crisis (GFC) and its aftermath. Investors remain apprehensive.
Although the theoretical “risk-free” nature of cash products offers security, its relatively low long-term return means investors could be missing out on better returns in other asset classes.
Cash has been tagged the “I don’t know what to do” option; but now, as memories of the GFC begin to fade a little, advisers are looking for the catalyst that will give investors the confidence to emerge from their safe havens and once again take on some investment risk.
Andrew Inwood, principal of CoreData-brandmanagement, believes seeing some level of economic certainty is the catalyst that will bring cash back to original allocations.
“When there is confidence around people’s ability to earn income and when job security is restored, then people will move out of cash and into other asset allocations,” Inwood says.
“We also started to favour cash as an asset class over shares and other [investments]. Cash is attractive, liquid, a risk-free opportunity. So it becomes an attractive asset class for all those reasons. Rich people are starting to move out of cash, but the mass affluent haven’t started yet. They tend to move when it’s too late.”
Serg Premier, general manager of deposits and transactions at NAB, agrees, trusting that stability in equities will encourage a shift back to traditional allocations.
“We’ve seen this for a long period: as you get volatility in the equity market, you get a movement into cash. Stability is clearly one of the catalysts,” he says.
The rebalancing back into other asset classes obviously also depends on clients’ individual goals.
David Simon, executive financial planner at Westpac, says the“catalyst comes down to the client’s investment objectives and goals”.
“A lot of our clients have longer-term goals – so five years-plus – but cash is very much a short-term based investment option,” Simon says.
“Over time, growth-based assets have generally outperformed cash.
“That’s why clients are more aligned to invest in growth assets. However, because the sentiment is quite poor after the global financial crisis (GFC), people are reluctant to completely invest their cash [into other allocations] all in one go.”
The Dimensions: Wall of Money Report November 2010, released by Tria Investment Partners, asks whether the “wall of money” – the $70 billion of post-GFC cash that flooded into bank term deposits in 2008-2009 – will return.
Tria says the structural demand for yield “will continue to increase as the population ages” and so for managers providing the right products, it is purely “a waiting game”.
Conversely, the solid foundations of traditional mortgage funds appear “bleak” for the future.
In any case, “it will not be business as usual” if the wall of money returns.
The Australian Cash Report for Quarter 3, 2010, conducted by CoreData-brandmanagement, found that $55 billion was sitting in surplus retail deposits as at June 2010.
Inwood says he isn’t surprised by this buildup of cash.
“Australians have switched to saving their money instead of spending,” he says.
“We became savers after the GFC and this happened really fast in October 2008. We’ve become net savers really quickly, and that behaviour is just starting.”
Simon believes surplus cash has “not significantly built up as an outcome of the GFC itself ”, but reiterates it’s as a result of its short-term nature.
“Cash is normally held for only two to three years, because of the fact that it is capital-secured and there is no volatility, whereas the other asset classes, such as shares and property, have a time-frame of at least five to seven years,” he says.
Simon says Westpac has been rebalancing its clients’ portfolios in order to address the cash imbalance.
An initial asset allocation will change over time, he says.
“Rebalancing has been a critical strategy in the current market, because the natural default is that cash allocation had a greater allocation due to the fact that growth assets have come down. Naturally, when clients rebalance and reset, you’re moving away from cash into growth assets.”
But Simon says it’s still important to make sure clients are “maintaining a minimum cash reserve to access for immediate needs and short-term needs”.
“Let’s say, for instance, a client has got 25 per cent of their original portfolio in cash and 75 per cent in growth assets,” he says.
“If growth assets reduce in value or perform worse than cash, [then] at the next checkpoint meeting, the allocation to cash is made greater than the 25 per cent. If it’s now 30 per cent, what we do is rebalance the client back to the original asset allocation. So effectively, that would mean reducing the cash component by 5 per cent, then replacing that into the growth assets to get that back up to 75 per cent.
“A couple of things we are doing – which means that over time the cash component is reducing – is, for instance, the concept of dollar-cost averaging.
“Our clients invest the same amount of money spread over a period of time and make regular contributions rather than investing one lump sum.”
This minimises the risk of clients investing into a market at its peak.
“One of the outcomes is that the client is effectively employing the principles of buying low and selling high,” Simon says.
“By default, they’re slowing reducing their cash component. So part of the strategy is that they gradually get into the market by reducing their cash component over time and, obviously, increasing their market-related growth assets at the same time.
“During the initiation of the GFC, a lot of our clients became quite scared to put all their money in at once. A strategy we adopted was to defer the investment over a period of time. We’re finding that over the last couple of years people are gradually getting most of their dollar-cost averaging strategies completed.”
Peter Forrest, head of cash product for Macquarie Adviser Services, says an effect of the GFC may be that long-term cash holdings in portfolios are higher in future than they were previously.
“We’re seeing advisers will continue to have demand for cash and cash products, through good times and bad, because of their ability to provide capital security,” Forrest says.
“This means customers are still after simple products that offer a good return.
“Advisers are always looking to mix their portfolios on behalf of their clients, so it will depend on individual situations; but we’re seeing cash, in a medium- to long-term strategy, forming a bigger part of assets compared to how it was a few years before.”
Forrest says the demand has prompted Macquarie to swiftly provide enhanced cash products to its customers.
“We continue to develop our cash products to have strong functionality and [we] invest in technology to enhance this,” Forrest says.
“We also provide competitive interest rates, as well as a focus on our service and on the relationship with our advisers to continue to support them.”
NAB also chose to revise its cash product offerings after the move to cash during the GFC “reprogrammed” an appreciation for the defensive asset among advisers and investors.
“We’re been improving our existing product, the National Cash Manager Account,” Premier says.
“The features we are focusing on are a competitive interest rate paid on the entire balance; providing a flexible commission structure, obviously for the professional planners; and we also have the rebate commission returned back to clients. It offers a dedicated service team specifically for financial planners so that they can call us and get assistance and help.
