How much longer will cautious investors stick with cash?

Many financial planning clients remain decidedly cautious, with many clinging to cash and cash-like investments given the current market volatility. A Money Management roundtable examined the implications of this and the prospects for a change in sentiment.

Mike Taylor, managing editor, Money Management: You’re talking there about how cautious clients remain. I think we’ve all basically acknowledged – definitely in our magazines anyway – that there’s a bit of a wall of cash out there, with people still clinging to cash and cash-like investments, given the interesting times in which we live. 

I know this is a big call to make as Australian equities specialists, but I’ll go back to you Claire. Are you seeing that embrace of cash breaking down in any way, because the read-out I’m getting is that there is a very tentative at least – or even beyond tentative – move back into equities and into that sort of allocation? 

Claire Mackay, financial planner, Quantum Financial: For those clients who are looking for that yield and that growth, we have over the last 12 months been assisting them in going back into the market. 

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It has been very structured and very focused on a client basis, but also where we’re going with the market. The historically high currency clients have been keen to go into the US because of the belief in the strength of the recovery of the US economy, even though it’s stuttering and isn’t really getting that momentum. The currency overplay is something that is also working for it. 

But also, looking for yield, there’s Aussie equities as well, because the cash return isn’t enough to fund people’s retirement. Three percent cash rate, that’s not enough compared to where it was five years ago, where the concerns around risk and the corresponding yield made it a good place to be. 

Mike Taylor, Money Management: I notice that the super returns as outlined by the ratings houses over the last few weeks are very definitely in positive territory, and that’s been driven by not just Australian equities but by international equities. 

Are people capable at the moment of building a portfolio of shares and getting back into the market in a way that’s going to maintain that, or do we see that as a short-term manifestation of where things are at the moment? 

We’ve had a pretty good six to nine months in the market. Is that something that you think can be sustained or is it going to peter out? Jonas, have you got a view on that? 

Jonas Palmqvist senior portfolio manager, AMP Capital: I think it makes a lot of sense for Australians to go a bit more international on the equities side over time, because on average I think Australians are overweight a few stocks in the Australian stock market, not always on purpose. 

You might have a few Australian equity funds and then you might have a direct equities overlay – Commonwealth Bank and BHP. So you’re doubling up on the few really big stocks here, exposing yourself a bit to the downside in the domestic economy and the mining side. 

I think it makes a lot of sense to keep building an international portfolio over the cycle for many Australians. I think that’s probably something that’s come a little bit late in Australia, that internationalisation, but it’s going to keep going, that’s my view. 

Dominic McCormick, chief investment officer, Select Asset Management: I’d agree with that, although I think it’s a very challenging time to be putting together portfolios at the moment because arguably a few overseas markets look expensive as well. 

And the US: maybe not just on straight PEs, but we’ve got to remember profits and share of GDP are at record levels, and the economy there is still somewhat fragile, although I think it’s benefiting from looking better than most. It has benefited from this very low interest rate environment for an extended period. 

But I think markets more generally are somewhat vulnerable in the current environment. It probably makes sense to skew more towards some of those areas that have underperformed such as Asia, emerging markets more generally. Parts of Europe, I think, are more attractive from a valuation point of view. 

I think overall – given the run that shares have had generally – actually building portfolios is difficult even outside shares, given where interest rates are in particular. 

Tim Samway, managing director, Hyperion Asset Management: I think it’s always a good time to be investing in Australian equities – you wouldn’t expect me to say anything else. That’s just experience over 17 years of investing in equity markets, that sometimes there are good times and sometimes there are better times. 

And certainly as you noted, a couple of years ago there was a wonderful opportunity when five-year IRRs [Internal Rate of Returns) were at 33 to 40 percent; that was just an amazing opportunity. 

Just to pick up on an earlier point, I think there has been quite a bit of money flowing back into the Australian market, but it’s chasing near-term yield and it equates the capital risk of investing in a bank share with that of investing in a cash deposit - and they’re not equal. 

That’s really one of the issues that we have looking at this market - that in the short-term the yield looks good but over the next 10 years bank profits just seriously aren’t going to grow to the level they did before. 

We were in a credit boom 10 years ago, right now all we see is the deleveraging. The banks seriously aren’t going to be able to keep that yield up. 

I think there’s a number of deluded investors out there who think they’ve cracked a terrific retirement option with these high yields, without looking at the potential for capital loss. 

Veronica Klaus, senior investment consultant, Lonsec: I think it’s quite interesting because there are a lot of different views as to what the potential outcome will be in so far as where we expect the markets to be, and what will happen both globally and in Australia. So it does make building portfolios extremely difficult. 

The other thing I’d point out too is that more than ever we need to differentiate between who our client base is as well. 

Building accumulation portfolios is now very different to building portfolios for retirees. I suppose one of our big concerns with this chase for yield – that is quite clearly going on in the market place – is that it is predominantly being chased by the retiree market. If you want to throw the word bubble around anything, it may well be around this chase for yield and the yield environment. 

So yeah, we’re extremely concerned with the fact that retirees really do have exposure to or can’t expose themselves to things like sequencing risk. They are the ones chasing what may well be the next bubble in this market. 

So there’s a lot of concern with things and it’s making building those portfolios difficult.