Cash on the nail is the modern way

This reflects both the need to look more closely at how and where cash is kept and also the growing risk aversion that has kept many investors out of traditional markets and, hence, holding more cash than for some time. We can add to that the reality that as interest rates have fallen steadily, those investors who rely on income from their cash are looking to find ways to restore that reduced income.

In the past cash was not thought of as an asset class and day-to-day needs were met with cash in the bank or building society and surplus amounts were placed on term deposit. For wealth managers, cash was that part of a portfolio that was temporarily not invested in shares or bonds and so was probably held in their bank account on the client’s behalf. Few people thought that there was any significant capital risk – the only consideration was perhaps to seek the best return and, in an environment where interest rates were much higher than today, that was unlikely to take too much time or effort. The only investors who devoted time to cash were treasurers of banks, insurance companies and possibly the large institutional investors, using wholesale money markets that were largely unknown to the retail investor or, for that matter, most investment managers

Bank failures in the UK were rare and when they did occur, as with Barings, it had little relevance to the retail investor or bank depositor.

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However times have changed and cash can no longer be automatically considered risk-free. Countless examples since 2008, coupled with the global economic slowdown, have shown that we cannot now take for granted that all banks are safe. The Financial Services Compensation Scheme guarantees a deposit up to £85,000 but beyond that depositors are at risk and that necessitates either increased research into a bank’s creditworthiness – a difficult task for many – or a spread of cash with more than one bank.

Even this latter approach can be an administrative burden. It is no longer a simple task to open a new bank account and for those with significant amounts of cash it can mean having multiple accounts with £85,000 or less. Given the need to keep monitoring rates available in the banking market, to keep track of the ‘special offers’ and renew deposits, this can become a full-time occupation. Some investors are happy to do this but many do not have the time or inclination.

An alternative place to keep cash is to use liquidity funds. These have been around for many years in the US and have grown in popularity in the UK as a direct result of the falling confidence in banks. These funds provide quick and easy access to a pool of widely diversified money market instruments – formerly the preserve of the large institutional investors. Cash can be deposited and withdrawn on a daily basis and the understanding is that the capital value of units in the funds will remain at par value, with income paid out, usually monthly, or accumulated at the investor’s choice. However capital value and daily liquidity are not guaranteed and ultimately depend on the willingness of a fund’s manager to provide support for their fund in a difficult period in order to retain investor confidence.