Insights on investments
How is economic uncertainty impacting term lengths? Is cash still king? Where is interest increasing and waning? Citywealth speaks to investment experts to uncover the answers and discover the trends of today.
Uncertainty & investment terms
How is current economic uncertainty impacting clients’ desires regarding long-term vs short-term investments? Are these desires in line with what advisors are recommending?
David Semmens, Chief Investment Officer at Cadro, said: “The current economic uncertainty is perhaps more modest compared to the last few years, however that is an exceptionally high bar considering it encompasses Covid, the subsequent impact on inflation, Russia’s invasion of Ukraine, and then the escalating conflict in the Middle East. But one enduring factor through these events has been economies and by extension the markets’ willingness, and indeed need, to adapt and evolve. So, while there is understandably some concern about how quickly central banks will be easing interest rates and whether a hard landing can be avoided, the real spark in the battle between short and long term investments has been the return of compelling cash yields.”
He added: “The opportunity once more to earn an appealing and risk-free return does give some people pause for thought when considering their investments. However, the lack of durability of cash as a return vehicle with the potential to beat inflation over any reasonable period appears unlikely to alter, especially as interest rates are likely to have peaked for this business cycle. For this reason, we remain focused on equities and private market opportunities to generate long term returns.”
Yazmin Boden, Partner at GSB Capital, answered: “If I may be so bold, investors without the appropriate level of guidance may have become wrongly bearish in recent years. Our clients, however, have remained disciplined. At GSB, we take the time to help our clients tune out the noise of the market and instead remain focused on the long-term investment evidence and their unique objectives.”
“Despite uncertainties, the current climate is teeming with investment opportunities, not limitations. Traditionally, an allocation to fixed interest acts as the most effective diversifier for any investor who isn’t looking to take on the risk of a pure equity mandate. However, prior to 2022, fixed interest was largely an unproductive asset. Interest payments on bonds were unexciting, unless you were willing to dive into the world of high yield bonds, at which stage you’d frankly be better off increasing your equity allocation. Today, a balanced investor can earn a decent return on both sides of an equity/bond portfolio. Similarly, most of our clients now hold an allocation to the Money Market, paying c.5.00% interest with zero capital volatility. Thus, in the last year the opportunity for low risk yet attractive returns have been tenfold, I would argue it’s been a very easy time to make money as investors, as opposed to a period of fear and uncertainty (purely from an investment perspective).”
Answering from a charity-sector perspective, Melanie Roberts, Head of Charities at Sarasin & Partners, said: “In the Charity sector, our clients’ long-term objectives need to be balanced by their short- and medium-term spending needs. This is why we place so much emphasis on creating an appropriate investment strategy for each individual charity’s needs from the outset. This typically considers evaluating any ethical restrictions and a sustainable spending level, in addition to the trustees’ risk appetite. For long-term monies, equities and other real and return-seeking assets can make up 80% or more of a portfolio and we continue to see strong demand for such portfolios. For those with shorter-term liabilities to meet, the asset allocation is typically reversed, with 80% or more invested in short-dated bonds and defensive investments.”
The end of cash’s reign?
We queried the experts on the common adage of ‘cash is king’. Is this still the case? In particular, is the element of being able to access funds quickly of particular concern?
David Semmens said: “Investors might have agreed that cash is king, with central banks raising rates only increasing that message, but this reign appears to be coming to an end.” In terms of access needs, he said: “Certainly, cash is impossible to beat when it comes to having dry powder to move quickly, and everyone needs a certain level of liquidity to operate and meet their day-to-day expenses. But our clients are driven by very long-term investment goals, often measuring success with a multi-generational lens. So, while we prefer to use cash selectively to take advantage of compelling opportunities when they present themselves, the cost will rise as interest rates come down over the coming quarters. We have seen strong demand for our cash management product, which is used as part of a holistic wealth management, full balance sheet planning approach, with no requirement of swift access.”
Yazmin Boden answered with another adage: “[C]an you catch a falling knife? The answer is no, you can’t. And if you do, it’s luck. At the beginning of 2023, cash certainly was king. Equities remained negatively volatile, and those holding bonds older than 2 years old were probably facing quite a drop in capital value. Of course, the issue was from late October 2023 onwards, equities rebounded quickly and continue to do so. Suddenly, the 6% return on your cash deposit or NS&I offer looks a lot less exciting when faced with 20% global equity performance. Swapping from cash back into equities is fine, but you’re buying high. Knife dropped, opportunity gone.”
She added: “Interesting question around access – advisers should be managing each client’s emergency fund and short-term spending needs separately from the investment conversation we are having here. In recent years, the ability to access funds quickly, isn’t the main motivator for investing via cash deposits. Ultimately, it was the lack of volatility.”
Can concerns around liquidity be linked to certain demographics? Boden said she thinks not: “Guaranteed deposit rates with zero capital volatility certainly had curb appeal after the simultaneous downfall of equities and bonds in 2022. A downfall that ultimately left scars amongst the investor community. Hence the current preference for cash amongst many investors across all demographics.”
Melanie Roberts noted that “with interest rates at higher levels, charities are more comfortable holding large sums in cash pending shorter-term demands.” She explained: “The cost-of-living crisis has seen charities continuing to face increased demand for their services, which in turn, puts pressure on their own cost base. We try to help by working alongside trustees and the charity’s finance team to model cashflow scenarios and ensure they are not forced to sell more volatile or illiquid assets at the wrong moment in the economic cycle.”
Charting interest
What types of investments are currently seeing increased interest? Where
David Semmens highlighted private markets as an area that is seeing particular interest. He said: “While this asset class has seen significant volatility over the last couple of years, it remains undeniably well positioned to increase as a proportion of long-term investor portfolios. This increased interest comes quite simply because earlier stage companies are generally more innovative and hold greater potential for future growth. While such investments carry additional risks compared to listed companies, these are generally well known and understood. Equally, the higher interest rate environment, which is likely to see normalisation ahead, has increased discipline in the sector and driven valuations down to more compelling levels.”
It appears private markets are peaking interest in the charity sector as well. Melanie Roberts said: “Private markets have seen growing interest, particularly as investors look for ways to access different parts of the market and excess returns. The extraordinary degree of listed equity market concentration that has been so evident over the last year, together with the fact that public markets have been shrinking, has focused many investors’ minds on ensuring diversification across their portfolios. Naturally, this might not be an option for all clients, and we acknowledge that making any allocation to a different asset class is a complex decision. As ever, these are questions best discussed with an experienced investment manager to fully understand the portfolio implications.”
Yazmin Boden’s answer concerned some shiny assets: “The common offenders of gold and crypto keep falling across my desk. I’ve learnt that you can’t incur a period of equity volatility without gold being promoted as the answer to all your investment prayers. I will always take Mr. Buffett’s word when it comes to gold. You pay to store it, it’s not going to generate any income and it lacks utility. I admit that the introduction of crypto ETFs did spark a brief moment of interest in me. However, the volatility is undeniable, which is not right for the majority of our clients. The amount GSB would be willing to allocate to a crypto ETF within our portfolios is so minimal it renders it largely pointless.”
She added: “As investment professionals, I believe it’s best that we stick to the fully regulated side of the investment market, within asset classes that have a proven track record and can be supported by robust evidence. Despite the synchronised downfall of equities and bonds in 2022, this phenomenon is incredibly rare and doesn’t call for a deep, routed overhaul of your investment philosophy. A combination of equities and bonds is the proven way to drive long-term returns.”
The trends of today
Finally, we asked the experts what current trend or issue they are currently keeping their eye on in the investment space.
David Semmens: “Firstly, as a firm, we are always focused on greater engagement from clients with their investment portfolio, which tends to be driven by clear and concise communication. This is done by delivering enjoyable content, combined with a comprehensive suite of tools that allows investors to truly understand where their wealth is invested and how it is growing. As an industry, wealth management can be resistant to change and that presents an opportunity for an entrepreneurial firm such as Cadro.”
Yazmin Boden: “There are two areas we have actively got our eye on, fixed interest and smaller companies. When interest rates increased, the capital value of longer-dated bonds suffered, as they would continue to pay lower rates of interest. This year, we know that rate cuts are due. It’s just a question of when and how quickly. We may see a sharp uptick in the value of longer-dated bonds. Thus, there is an argument for arbitrage here. For those who didn’t exit longer dated debt prior to rate increases, I’d suggest you continue to hold, bide your time. Smaller companies within top indices have suffered similarly, as the increased cost of borrowing adversely affects their bottom line. Again, where rate cuts begin, investor confidence in these types of companies should rise, and subsequently, prices. The opportunity to buy into good companies cheaply still exists despite excellent 2024 equity returns. Particularly within the likes of the US market, where broadly the FAANG stocks continue to drive the upward momentum.”
Melanie Roberts: “From time-to-time we are asked about investing in cryptocurrencies for charities. Again, this a growing area but not one without significant risk and volatility. We continue to research this area but for the time being, we remain happier watching from the sidelines.”
Thank you to all of the experts who contributed to this article.
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