This is according to Sean Segar, Head of Product: Cash Solutions at Nedgroup Investments, who says the cash allocation of a retirement fund not only provides a stable, predictable, consistently positive return – albeit lower than other asset classes, but cash also provides valuable diversification, additional liquidity and importantly, a parking place for assets in times of market turmoil.
Cash certainly has a role to play in a balanced investment portfolio. It is the ultimate positive return asset class, but is often overlooked in times of market exuberance.
“Parking a higher than normal proportion of assets in cash is a particularly valuable tool for retirement funds looking to ride out the volatility in the markets at the moment especially as cash can earn around 7% with very low risk. An unexpected market downturn could have lifestyle-changing implications for retirement fund members, particularly those close to retirement. Therefore, by increasing the portion of assets invested in cash in a multi-asset strategy, members are afforded a greater degree of protection while markets settle,” he says.
Segar points out that a key role of cash in a portfolio is not to generate above average returns, but to act as an adaptable tool to protect retirement funds against particularly volatile periods. “The risk and volatility with such a money market investment is very low and the capital and a return marginally ahead of inflation are virtually guaranteed. For members of retirement funds, particularly those close to retirement, this is of crucial importance, especially where the current portfolio value is ahead of plan as is the often the case after years of good investment markets. Banking profits and parking cash can be a sensible strategy. Retirees are particularly vulnerable to volatility.”
However, Segar stresses the importance of ensuring that the cash portion of a retirement fund is still generating yield.
“Lazy cash is wasted cash. Although cash is not a high-growth asset, it should still be put to work optimally and not wallow around in call or even lower yielding current accounts. The yield generated from hard-working cash all adds up and can be significant over the longer term making a real impact on a retirement fund,” says Segar.
The argument for retirement funds utilising short duration unit trusts for their cash building blocks in a specialist investment approach is very compelling.
“Using these pooled vehicles offers higher yields via professionally managed portfolios with a spread of counterparties, all in a highly regulated environment with independent trustees, better liquidity and daily unit pricing. Such vehicles are highly convenient and offer lower fees. Money Market unit trusts are not just for small funds. Even very large retirement funds will benefit from using pooling for their cash segment. Many money market funds are AA+ rated adding additional comfort to investors.”
Segar says by strategically allocating cash, retirement funds can also mitigate some of the effects of rising interest rates for members.
“Investors in pooled investment vehicles like the Nedgroup Investments Core Income Fund will enjoy the benefits of the rising rates as the yield of the portfolio rapidly adjusts to market yields.”