Plating-up the asset cake

Victoria Tait | 08 Feb 2012

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Victoria Tait is a senior journalist with IFA, a Morningstar publication.


Financial planners, wearied by four years of staring down volatile financial markets, are steering ever larger slices of clients' money into cash and term deposits.

Australia's dash for cash could be attributed to high interest rates here relative to the rest of the world. However, if industry comments and recent survey results are anything to go by, there is no trick to asset allocation in these troubled times.

"With the European crisis still not resolved and the effect on the world economy, even those who have a longer-term risk profile of, say, a balanced or growth investor, we're still recommending that they remain very conservative at this stage of the year and maybe all of this year," Synchron director John Prossor says.

What portion of a very conservative portfolio sits in cash and term deposits?

"All of it," Prossor says.

"We're not trying to pick the right time to go in. We think markets could still go down by a substantial amount over the next six months - maybe longer."

The latest World Bank report appears to vindicate the caution exhibited by Prossor and others.

In its latest "Global Economic Prospects" report in June, the World Bank cut its global economic growth forecast to 2.5 per cent from 3.6 per cent. World Bank global economics team head Andrew Burns says a lot has changed in six months.

"This is going to be a very difficult year," Burns told reporters.

Prossor notes financial markets have been in turmoil for more than four years.

"I don't like saying it's different this time, but it's certainly more severe than we've experienced in our working lives as financial advisers," he says.

Asked whether clients worried about missing out on an upturn, he says they were concerned for a year or two but the concern has given way to fatigue.

"They're now so battle-worn, they're saying 'just leave it in cash'," he says.


Cash on the sidelines

Investment Trends' recent survey of nearly 1000 financial planners shows they expect domestic equities to return a meagre 3 per cent in 2012.

"Basically, return expectations have collapsed," Investment Trends senior analyst Recep Peker says.

"People are going to cash and term deposits because they don't expect markets to perform well."

As a result, the proportion of new client money allocated to cash and term deposits rose sharply in the five months to June, according to the "Investment Trends November 2011 Adviser Product and Marketing Needs Report", released earlier this month.

The market research group's survey of 966 planners across Australia shows 28 per cent of new client money went into cash and term deposits as of November, up from 18 per cent in June and 16 per cent a year earlier.

"This has come at the expense of both listed investments and managed funds," Peker says.

Meanwhile, the percentage of new client money allocated to managed funds and listed investments fell to a combined 65 per cent by November from 75 per cent in June.

"We asked planners how much cash they thought they had across their entire client base which they would have otherwise invested in growth assets," Peker says.

"The average estimated total cash holding was $3.9 million [per planner]. That's up from $3.2 million last year."

CoreData's latest "Investor Sentiment Report" shows investors believe returns from cash will be less attractive this year - but they still plan to hoard it.

The percentage of people who believe cash would perform worse in the fourth quarter of 2011 than in the previous quarter came in at 29 per cent, outweighing the 25 per cent who believe performance would improve.

"At this point, the perception is that interest rates are more likely to go down than up, and this would obviously affect the performance of their cash," CoreData head of advice, wealth and super Kristen Turnbull says.

"I think it's really interesting that, despite this, it's actually still the asset class people are rebalancing towards."

More than anything, investors want a safe haven and a quiet life.

"They still don't see the uncertainty in global markets being resolved," Turnbull says.

"As a result, they feel that cash is a safe haven so regardless of the fact that they might not get as good a return as they might have gotten last quarter, they're still continuing to put cash in the bank rather than in the markets."

Underpinning the survey result, CoreData's Investor Sentiment Index slid to its lowest level since the market research firm first gauged sentiment seven years ago. Perhaps even more telling, the index's latest reading was below GFC levels.

The most recent index measured the sentiment of 843 people nationwide over the two weeks to 5 December. Respondents ranged from those with no investments to high net worth individuals.

The index came in at -22.4, notching below -22.3 in the first quarter of 2009, when the GFC began to bite in earnest. It also marked a seventh straight quarter of negative readings, which CoreData said highlighted the prolonged effect of the GFC on investor confidence levels in Australia.

"Over 2011, we've continued to see a decline in investor sentiment," Turnbull says.

"The fact that people are rebalancing towards cash suggests that's not going to change in the short term. We're not likely to see a massive turnaround in the first half of the year."

In addition to individual savings accounts, corporations are holding large amounts of cash on their balance sheets, Ibbotson Associates managing director Daniel Needham says.

"But that large amount of cash makes it difficult to stay there. When everybody is very bearish and negative, they can be very easily surprised to the upside," Needham says.

"Greed takes over from fear, and they don't want to miss out."

However, Needham says investors have good reason to hold cash at the moment, given the large fundamental risks lurking in global economies.

Besides Europe's mountain of debt woes, the potential for reduced government spending in the United States and potential economic slowdown in China are enough to send even the largest risk appetites to the meat and three veg of portfolio allocation - cash.

However, Needham says all that cash sitting on the sidelines is good news for financial markets.

"Companies with a lot of cash on their balance sheets are going to be buying stock back, they're going to be increasing dividends, and down the track, they may even undertake some [mergers and acquisitions]," he says.

"To be honest, that amount of cash on the sidelines is one thing that makes me less bearish about equities. That provides a potential support for the market as people start to deploy that cash."

Another reason why cash is so large at the moment is because bond yields are so low. Given yields are so low, it wouldn't take much of an upside surprise from the bond market's arch-enemy, inflation, to bring about losses.

"I don't necessarily think it's only an 'underweight equities' story. People are underweight bonds as well," Needham says.


No parking

Brian Parker, investment strategist at National Australia Bank's MLC Investment Management, says the flight to cash is logical in terms of human nature, but unhelpful in terms of financial wellbeing over the longer term.

"To me, you don't invest in a term deposit, you park in a term deposit. Let's be blunt about this: you don't build serious medium to long-term wealth by parking. You build it by investing. At some point, you're going to have to allocate at least some capital to businesses, which means the sharemarket," Parker says.

"The sharemarket is still your best chance of building long-term wealth. You can choose to go into it when the market is down, or when you choose to go into it when the market is 1500 points higher. What would you rather do?"

Investors Mutual senior portfolio manager Hugh Giddy says increased volatility is the price investors pay for the additional income garnered from equities.

"I'm not saying we're on the cusp of a bull market - I wouldn't bank on that - but I would bank on the fact that you can get a good, tax-effective yield out of equities, and if you invest sensibly with a good manager or good stock-picking, you can make a decent return," Giddy says.

He says he focuses on attractively-priced quality stocks.

"The best way to do my job is to try and pick the stocks that look to be reasonable value without worrying too much about where the overall market is going," he says.

"I have been cautious on the markets, and that's been right, but what's more important is to find the better companies, the cheaper companies. That's got to be the main focus for anybody, I would say."

Nonetheless, even hardened professionals have battened down the hatches.

"In the super industry at the moment, cash is running at about double the normal levels," AMP Capital head of investment strategy and chief economist Shane Oliver says.

"It's about 13 or 14 per cent instead of the usual 6 or 7. That's in the whole superannuation system.

"I don't think it's going to be a permanent phenomenon, but in the environment we're in, it might sit there for a while yet. It also might take a while before it gets back to the norm - about 10 per cent."

Diversification is key

Fidelity Worldwide Investment director of asset allocation Trevor Greetham says the global fund manager enters 2012 with its portfolios as defensively positioned as they were in 2008.

"Moving into 2012, we continue to favour bonds over equities," Greetham says in a report.

"We remain underweight in commodities, albeit overweight in gold."

He says Fidelity's deepest concern is Europe, where policymakers are basically doing too little too late.

Fidelity's favourite global equities market is the United States because it has relatively defensive attributes, including a pro-growth economic policy, he says.

"In summary, investment conditions remain difficult. We expect short, violent economic cycles driven by bouts of unprecedented fiscal and monetary stimulus," he says.

"Diversification across a range of asset classes will remain an attractive proposition and there will be lots of opportunities to add value through a sensible tactical asset allocation policy."

Parker says MLC has changed the way it allocates assets by getting clients to set return targets and timelines.

"You tell us your time period and you tell us your target return and we'll put together a portfolio that will maximise your chances of getting there," he says, referring to MLC's Horizon fund series.

"That's where asset allocation is starting to head. They're the sort of conversations we're having and I suspect other people are having them, too."

If the fear is still too overwhelming, spare a thought for Huntleys' Your Money Weekly editor Ian Huntley.

"The bears to my mind under-rate the importance of an extended period of low interest rates in the major countries of the developed world likely for the next three to five years," Huntley says.

"Just add animal spirits to this confection."

This report appeared on 2022 Morningstar Australasia Pty Limited

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