Cash conundrums in uncertain times

Published  25 September 2023
   4 min read

Against a backdrop of rising inflation and periodic bouts of market volatility, conventional attitudes towards investing have been challenged over the last 18 months or so.

This has further fuelled the temptation to move into cash, with some interest rates offered going north of 5%. But with heightened regulatory scrutiny on platforms holding investments on deposit and different ways to invest in cash-like investments, this presents challenges when looking to allocate clients’ money into cash. 

Last autumn, we saw a lot of switching activity across the market into cash, including among advised clients. There are usually very valid reasons for moving into cash. But recently there have been clear instances of fear and emotion kicking in and forcing the hand against clients’ long-term plans.  
The desire to allocate to cash investments as a short-term solution usually stems from one of the following two scenarios:  


1. Clients’ attraction to the current returns offered by cash

There may be pressure from clients and the principles of long-term investing may be sacrificed for an immediate short-term fix. This can be damaging over the long term as clients may miss out on unexpected gains and suffer further erosion from inflation. Or they could miss out on an equity bull run, for example if macro conditions were to quickly shift.  
There’s also the age-old rule that timing the market very rarely succeeds, particularly when some cash vehicles can lock money in for up to a year. Engaging with clients around periods of volatility is an excellent way to demonstrate value because, ultimately, getting them to stick to the long-term plan you’ve put in place will increase their chances of success.


2. Where clients want to secure an amount for an imminent withdrawal for a specific purpose

This could be an annuity purchase or preparing for a particular life event. In this case, the risk/return nature of scenario one is less relevant, and the focus is on the nominal level staying static.  
There are usually two ways to allocate a client’s investments into cash-like investments. The first is cash placed on deposit through a single institution. The second is investing in a more diversified money market instruments fund. But what are the key differences?  
Money market funds can provide liquidity by investing in cash-like instruments, such as short-dated Treasury Bills and certificates of deposits, as well as placing cash on deposit. The reason why the whole fund isn’t placed on deposit is because the idea is that all these instruments behave as you’d expect cash to behave, with an objective for capital preservation and the potential of additional yield.  
A key benefit of money market funds is that by diversifying across a range of issuers and issues, it builds in additional protection relative to placing a deposit on one institution, which could increase concentration risk within a client’s portfolio. They can also hold ultra short-term gilts and investment grade credit, mostly floating rate to reduce interest rate risk.  
The various instruments used in money market funds also receive a flow of coupon income daily, which can provide sufficient liquidity for the fund and, ultimately, those who are invested in it.  


In summary

Clearly, an allocation to cash-like investments has a place within diversified portfolios from a risk/return perspective, as well as potentially serving specific client needs.  
In the new consumer duty world, it’s imperative that you’re able to understand and demonstrate the key differences between ways to allocate to cash, as well as proving it delivers good outcomes. But, beware of the noise around the short-term gains of moving to cash in client portfolios. Markets have always been volatile, and volatility can create opportunities, not least the opportunity to engage with clients and demonstrate the value of the advice you offer.