In volatile times retirement funds look to cash to reduce risk
Given the high levels of volatility and uncertainty in the market, cash is currently providing attractive inflation-beating income opportunities for retirement funds, especially where risk is a key consideration for trustees.
“Steady inflation-beating income with relatively low volatility can be used as a crucial risk-mitigator in any retirement portfolio by maintaining sufficient diversification, with an increasingly larger cash allocation as retirement draws closer. Ideally, the cash allocation will still achieve meaningful real returns, while also reducing risk in the process,” says Quaniet Richards, Head of Institutional at Nedgroup Investments.
Richards says reducing or eliminating risk in retirement funds has become a primary concern for retirement fund trustees. With this spotlight on reducing risk, without compromising return, cash is currently presenting a good alternative to bonds.
“In the current environment, bonds are vulnerable to capital losses, while cash portfolios offer similar yields without the undesirable volatility of returns. Our experience over the years has shown that greater cash allocations, when professionally managed and adjusted over time, provide stable, predictable and consistently positive returns for retirement funds,” he says.
Pooled investment schemes such as money market funds are growing in popularity as a both a building block for the cash asset class and as a parking place for cash during times of uncertainty such as the current local situation.
“These investment vehicles are ideal as they provide positive returns with the optionality to quickly switch into other asset classes when the time is deemed right or the opportunity arises. They are also professionally managed in a highly regulated environment which adds an additional layer of protection,” says Quaniet.
Over the past five years, money market funds, including the Regulation 28 compliant money market funds, have achieved yields similar to that of the All Bond Composite Index (ALBI), but, notably, at significantly lower volatility. The return on cash has been also been above inflation (which has varied between 4.5% and 5% recently), generating real returns.
With inflation remaining within the target range for the past few months and the inflation outlook under control, the opportunity for retirement funds to increase their cash allocation while achieving meaningful inflation-beating returns and lower risk across the fund should remain for some time. This which could be positive for retirement funds who use it wisely.