February has proven to be one of the most trying months for global markets in history; the S&P 500 experienced a nine percent fall, the Nikkei saw a 12 percent drop in just one week, the FTSE 100 fell to its lowest level in three years, the share price of Britain’s banks plummeted to a seven-year low, and over $1.5 trillion was wiped off the value of global equities.
With this turmoil expected to continue over the coming weeks, it’s unsurprising that equity allocations have declined to their lowest levels in two and a half years and cash allocations – widely regarded as a safe haven in times of market volatility – have risen to their highest levels in that same period.
Interestingly, in October last year, billion-dollar fund manager of the Janus Global Unconstrained Bond Fund, Bill Gross, predicted a bear market within the next six months. He therefore advised that investors increase their cash allocations and wait it out until they have a better view of what direction interest rates, and the general economy, are going in. Looking at the start 2016’s gotten off to, I’d say he was bang on the money.
He then went on to argue however that whilst cash doesn’t lose anything, it also doesn’t yield anything, and on this point, I have to disagree with him. At the current time, cash is an asset class that with the right solution, will enable wealth managers to make a larger percentage difference return to their clients’ portfolio than in any other asset class. Not only that, but a well thought out and efficiently executed cash management strategy can help them gather assets, justify investment management fees and provide a series of on-going opportunities for further investment business.
Historically, nearly every wealth manager’s client has had some exposure to cash in his or her portfolio – typically between five and 10 percent allocation – but 2016 has seen a significant increase in this figure. With such a huge asset class and investors desperately searching for yield, an effective cash management solution is proving to be an invaluable tool for wealth managers. In higher risk portfolios in particular, cash can provide wealth managers with flexibility and the ability to cover management fees and take a view on asset prices.
However, while the supply of certain commodities continues to rise(!), there is one commodity where supply is still distinctly lacking – time. As interest rates remain historically low and look unlikely to rise in the near future, wealth managers know they could be making a higher return on their clients’ cash deposits if they had the time to constantly be researching bank risk, opening accounts, and moving their money around but many don’t.
The issue lies in the fact that most wealth managers don’t have a comprehensive, easy-to-use or cost-effective solution to enable them to do this. So what if they did?
A recent example – which is very typical of the one that Flagstone provides a solution for – involved a client who had £1.2m of invested assets with their adviser and was paying them 0.75% per annum for their services. The same client had £550,000 in liquid cash sitting with their bank, awaiting an investment opportunity.
That cash sat at a ‘high street’ bank, earning a low interest rate of 0.25% or £1,375 per annum. However, by having breadth of access to the market and the ability to deal at the click of a button, their wealth manager was able to boost the yield on their cash to 1.30% (or £7,150) per annum, net of fees, based on the client’s specific liquidity and risk parameters within minutes. That is an increase of £5,775 or over 400% on a gross basis. There aren’t many other investments that will boast that kind of percentage increase return over a 12-month period and, looked at another way, the increase in interest income offset over 60 percent of the wealth managers annual advice fee.
The reality is that we have no idea what the markets have in store for the rest of the year so if you are taking Gross’ advice and increasing allocations in cash for your clients don’t just let it sit there – as illustrated in the example earlier, by taking a smarter approach to cash management, wealth managers can ensure their flight to cash really takes off.
By Andrew Thatcher, Founder and Managing Partner at Flagstone.
This article first appeared on TheWealthNet.com