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Cash rules everything around me, as the Wu-Tang Clan observed in their mid-90s hip-hop classic that now serves as a handy soundtrack to financial markets.
Bridgewater Associates founder Ray Dalio once derided easy-access pots of money on deposit as garbage. “Cash is trash,” he said in early 2020. “Get out of cash” and in to more diversified assets likely to deliver a higher return, he said.
Dalio was not to know that the Covid pandemic would go global just a few weeks later, putting his hedge fund group through the wringer, and his comments made perfect sense at the time. Parking hard-earned money in one of the dullest and lowest yielding corners of the financial markets seemed daft in those halcyon days before lockdowns struck.
He stuck to that pronouncement until late last year, when short-term interest rates had kicked up to the point where he thought they were neither good nor bad. But fast forward a few months and cash is gathering a new level of enthusiasm in influential places.
“The king is back”, said BlackRock’s Simona Paravani-Mellinghoff at an event in London this week. The chief investment officer of solutions in the money manager’s multi-asset strategies group described cash as an “attractive asset class in its own right”, adding that “it should not be overlooked”. We have come a long way since the trash talking.
Three big factors underpin this. The first is good old fashioned yield. The rapid ascent of interest rates over the past year or so means that very short-term debt, even from borrowers with no serious chance of defaulting, churns out strikingly respectable returns. Quirks in patterns across debt of varying maturities mean that three-month US Treasury bills — the reference point for short-term cash pots — yield just north of 5 per cent, roughly the same as much riskier assets including high-grade corporate debt spanning several years.
That means equities now have to compete for a place in a portfolio against corporate and government bonds. But bonds also have to compete with cash. For some investors who suffered a bruising in bonds last year, that is a high psychological hurdle.
Another factor is that squirrelling an outsized amount away in cash gives investors a place to hide in case disaster strikes. That feels like a nice option when even the professional money managers have little clear idea where markets are heading, when a recession might land or how bad it might be.
This cuts both ways. It means that in some kind of adverse shock, say a chunky margin call or a hit to the value of other assets in a portfolio, a stash of cash can soften the blow.
But cash reserves also provide so-called dry powder — funds to deploy on high-conviction bargains at a moment’s notice. Under a strategy BlackRock described as “pivoting to granularity”, Paravani-Mellinghoff said it was important to “be prepared, be ready to act” when those sorts of opportunities arise.
Alex Brazier, her colleague and deputy head of the BlackRock Institute, said this kind of flexibility is essential in one of the more confusing and challenging market regimes that investors can remember. “It’s not everything, everywhere, all at once,” he told me. Bets on entire asset classes like bonds, equities or corporate debt simply do not make sense at the moment because the gaps in performance between individual stocks and credits are so wide. “It’s not a case of ‘income is back, so buy the bond [index]’,” he said. “Inflation is a serious issue and the level of rate hikes needed to tackle it is uncertain.” In turn, that means asset allocators have to be nimble.
“This is not the environment for broad index-level exposures,” he said. “It is very different from ‘great moderation’ investing,” he added — a nod to the long, lucrative decades up to the pandemic and outbreak of painful developed-market inflation. Cash on hand helps to navigate that.
In aggregate, it appears fund managers are not entirely on board with this argument. Bank of America’s latest survey of big investors this month noted that cash allocations have dropped significantly over the past eight months, down to 5.1 per cent of portfolios now — a 19-month low — from 6.3 per cent in October.
But other influential money managers are making a similar case, including Pimco’s chief investment officer Dan Ivascyn. Talking to the Financial Times in London, Ivascyn said he still expects the US economy to achieve the longed-for soft landing — a deceleration but not a crash. But, he said, the underpriced risk of something uglier should not be ignored. And it is easy to imagine the riskier pockets of debt markets running in to difficulties.
For him, it does not make sense to jump in to those asset classes right now. But any forced selling by other investors or other forms of distress could throw up opportunities too good to miss.
That means for both of those reasons — an urge to keep cash on hand in case of a nasty shock, and the desire for rainy-day funds to snap up bargains — managing liquidity has “got to be front and centre”. “Hold some cash,” he said, because the coming years will throw up chances to pounce.
katie.martin@ft.com
