Investment Bulletin:
May 2019

This month:

Wealth management experts weigh up safe haven assets, alongside pondering the prospects of US equities and alternatives. Investors are also urged to consider corporate diversity as a strong predictor of returns.

Expert investment views:

Evidence throws “Cash is king” beliefs into doubt

US Treasuries offer rare safe haven at reasonable value

Meanwhile, US equities could play out in wildly different ways

Time to “fix the roof while the sun shines” on alternatives

Attention called to the returns impact of corporate diversity

Featuring this month’s experts:

1. Cash is not king

Insights from:

Investment Bulletin: February 2015 - Find A Wealth Manager

The Yahoo! Finance headline just after Christmas was unequivocal: “The sexiest investment for 2019: Cash”.

This far into the year, that article could hardly have been more incorrect. Year to date, global equities have gained over 16%, while cash has made hardly anything.

But it was expressing a widely held view. When times are tough and markets have been falling, as they were in the final quarter of 2018, many investors run to cash. Cash is king, right? You can sit and wait out the storm in cash until markets improve.

Now it’s always useful to have some cash in your portfolio. Cash helps you to deal with unexpected demands and everyday crises. Cash is a buffer against the uncertainties of life.

Many investors don’t appreciate that cash is also a danger. One problem is that it can get eaten up by inflation. In the UK, for example, returns on cash have been lower than inflation in every year since 2009

But many investors don’t appreciate that cash is also a danger. One problem is that it can get eaten up by inflation. In the UK, for example, returns on cash have been lower than inflation in every year since 2009.

Between 1900 and 2018, it’s been estimated that UK equities gained 4.5% per year after inflation. Even after expenses and costs. By contrast, cash returned only 0.46% per year after inflation over this 119-year period. The cost of safety and security was returns one tenth of those of equity investors.

For long-term investors, then, cash is an expensive luxury. Most people would be better off holding as little cash as possible and buying a chunk of equities instead.

Seven IM - Terence Moll

Terence Moll

Chief Strategist at Seven Investment Manager

2. Is US government debt still a good investment?

Insights from:

China, Currency, FED, Interest Rates, Value Investing

US government debt, commonly known as US Treasuries, is the world’s favourite safe haven. This has been well demonstrated over the past six months, where fears over the health of the global economy have led to a strong rally in the price of US government debt. However, with economic worries abating, the question now is whether investors should retain their safe haven exposure.

Whilst investors may be cautious about owning the debt of other governments, we believe US Treasuries are a rare safe haven that offers reasonable value. You can earn an income of approximately 2.5% a year on US Treasuries, which is relatively attractive considering you have to pay for the privilege of lending to other governments like Germany.

You can earn an income of approximately 2.5% a year on US Treasuries, which is relatively attractive considering you have to pay for the privilege of lending to other governments like Germany

The main risk to the outlook for US Treasuries is if we see an increase in US inflation. This would likely lead to higher interest rates on cash and, as interest rates on cash rise, investors demand a higher income for lending to the government. However, US inflation remains subdued and there is little sign that this will change anytime soon.

Some commentators have warned that higher US deficits will undermine investor confidence in the ability of the US to honour its debt. If this were to happen it would take decades and likely require a complete restructuring of the global economy.

The more serious risk for UK investors is a potential rise in the value of sterling. All things being equal, this would reduce the value of overseas assets like US government debt. This risk can be partly mitigated by sensible portfolio construction, as well as by diversifying your safe haven assets into areas such as gold.

Paul Ord

Investment Manager at Quilter Cheviot Investment Management

Top Tip

It’s easy to think retreating into cash is your best option when the investment landscape looks uncertain, but there are far better safe havens for you to consider that do not carry the risk of your wealth being eroded away by inflation. If you are holding significant amounts of cash, discussing how to make that money work harder with a professional may be a very profitable conversation indeed
Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

3. Our thoughts on the US stock market

Insights from:

Blu Family Office

The S&P 500 reached 2,900 earlier this month, a level last reached in September 2018 and which was so out of reach just a few months ago when we dropped all the way to 2,250. So where do we go from here?

Technically speaking, we are at a very important cross road. Either the trend that we started in 2009 and which has persisted so strongly, producing returns of more than 400%, will continue. Or, we fail miserably to make new highs, and fall well below recent lows to test some of the more remote support lines below 2,000.

Either the trend that we started in 2009 and which has persisted so strongly, producing returns of more than 400%, will continue. Or, we fail miserably to make new highs, and fall well below recent lows to test some of the more remote support lines below 2,000

Fundamentally, we have also been at odds over the trend for a long time. Still reeling from the effects of the biggest financial crisis in history, central banks have thrown everything but the kitchen sink at the markets, trying to stimulate growth. This of course, all in an effort to get out of the increasing mountain of debt that has been amassed in quantitative easing and now stands at a higher level globally than before the crash.

Throw in political brinkmanship from the largest global economies, including trade wars, protectionism and the apparent end of globalisation, and you have an unqualified mess that not even the smartest people or the most powerful computers on the planet will solve anytime soon.

Where the US stock market goes from here is anyone’s guess and the less time you spend trying to predict the unpredictable, the better the use of your time, energy and money will be.

Expert Investment Views,Investing Tips,Investment Tips, Brexit

Christian Armbruester

Chief Investment Officer at Blu Family Office

4. Absolutely focused on returns

Insights from:

James Hambro & Partners

One of the problems of many absolute return funds is that they deliver absolutely no returns. They are akin to those big plastic swans you sometimes see on boating lakes – everyone is pedalling like fury and not getting very far very fast.

Worse, they still lose money when markets fall. The whole point of these alternative products is that they are supposed to be uncorrelated to markets. They should help smooth the ride and reduce the losses when markets correct. So, in the latter stages of a market cycle they are very important.

We’re feeling confident about equity markets at the moment, but on the basis that the time to fix the roof is when the sun shines, we’ve been reviewing our approach to alternatives

We’re feeling confident about equity markets at the moment, but on the basis that the time to fix the roof is when the sun shines, we’ve been reviewing our approach to alternatives. Our view is that alternatives should be consistent with the aims of our clients, which is seeking returns. Whilst that means they involve investment risk, they should have low correlation to equities and offer long-term diversification benefits. They should also be liquid, so clients can get their cash if they need it.

We would include property, infrastructure and renewables funds – in other words investments with real assets behind them (they will make up 25% of our alternatives allocation). Then there’s gold. And finally, the liquid absolute return funds – which are unlikely to be traditional long-short equity funds. We’ve been looking at some interesting options – asset-backed infrastructure, another that makes macro calls on global economies on a day-to-day basis, and a convertible bond fund that offers the protection of fixed income and the ability to convert into equities.

James Beck

Partner and Head of Alternative Investments at James Hambro & Partners

5. The diversity differential

Insights from:

Canaccord Wealth Management

Diversity and inclusion can have a big impact on returns, falling under both the social and the governance pillars of ESG investing (the first initial standing for “environmental”). But there is a long way to go: McKinsey research found women account for 12% of senior leadership positions in the UK. And a study by FundFire found that ethnicity is poorly represented, with 88% of board level executive committees being white. This is bad from a moral and an investment standpoint.

Evidence shows diverse teams have the potential to generate higher performance with lower risk. But we need to do more than just note the number of women on a board or the ethnic diversity of an executive team. These measures are useful starting points, but they offer little insight about whether a team is benefiting from diversity or hampered by a lack of it. Investors can and should do more.

Cognitive diversity is key and refers to a mix of skills, experiences, and perspectives brought to a problem – essential for a business making strategic decisions in a complex environment

The potential to improve work performance is important but misunderstood. Cognitive diversity is key and refers to a mix of skills, experiences, and perspectives brought to a problem – essential for a business making strategic decisions in a complex environment.

It is hard to assess diversity from a distance, but we have several tools at our disposal. Firstly, although demographic categories do not always link to cognitive diversity, there is evidence the two go hand in hand. Understanding the mix of gender, age, race and other demographics within companies is useful. Secondly, investors are able to analyse communications like annual reports and quarterly conference calls to analyse a company for diversity. And thirdly, companies are dynamic but diversity data is often static – seeing how the make-up of a company changes over time (employees’ ages, ethnic composition etc.) is useful.

It’s tougher than screening for basic diversity statistics, but the reward is insight into a company’s strategy and culture. We want to own funds that get this.

Patrick Thomas

Head of ESG Investing at Canaccord Genuity Wealth Management

Important information

The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.

We always advise consultation with a professional before making any investment decisions.

Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.

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