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Managing expectations: why is cash still king?

Paloma Kubiak
Written By:
Paloma Kubiak

One of the biggest considerations to make before putting your hard-earned cash to work, is to weigh up your appetite for risk versus the returns you expect on your investment.

Sometimes, the two can be wildly out of kilter. After all, the ‘holy grail’ for investors – an asset boasting significant returns with minimal to no risk – simply doesn’t exist.

According to the Schroders Global Investor Study, at the start of this year, 1,104 UK investors expected a stock market-based ISA to return an average of 5% per year over the next decade. After charges, this isn’t far off the reality of long-term returns.

Research from professors Dimson, Marsh and Staunton – as referenced in a recent blog from Montanaro – found that equities have delivered an average annual return of 7% since 1900.

At the other end of the spectrum, investors expected an average annual return of 3.2% from their cash ISA over the next 10 years. However, according to data site Moneyfacts, the best rate a saver can hope to get on their five-year fixed cash ISA is 2.30%.

Given that 47% of those surveyed named cash ISAs as their biggest holding, it is perhaps especially important to bridge any potential gaps between these earnings expectation and reality.

Those wanting to achieve slightly higher returns from the cash section of their portfolio, and who are willing to take on a slightly higher level of risk to do so, may wish to allocate some of it to highly-diversified, low-risk multi-asset funds.

Here, we look at some of the funds investors may want to consider:

Church House Tenax Absolute Return Strategies

A small boutique fund, Church House Tenax Absolute Return Strategies may have fallen under some investors’ radars. However, managers James Mahon and Jeremy Wharton have years of experience between them when it comes to protecting capital.

They aim to achieve steady returns which are lowly-correlated to markets, and they do so through a highly-diversified portfolio of assets ranging from stocks and bonds, to floating rate notes and alternatives.

Mahon and Wharton believe the key factors to successful investing are risk management, not paying over the odds for any asset and being unafraid to make big calls when the opportunity pool is scarce.

Premier Defensive Growth

Premier Defensive Growth aims to achieve positive returns over three-year rolling periods across all market conditions. What really sets this fund apart from its peers is its marked focus on capital preservation; manager Paul Smith will only buy into assets with predictable returns over a clearly defined period of time.

This means that regardless of how much he likes a particular sector or region, if there isn’t an option which he deems to be low-risk or predictable enough for the portfolio, he simply won’t invest. The manager also has a focus on liquid investments to further minimise risk. Smith favours ‘fixed life’ and ‘fixed entitlement’ assets; while he believes the former’s potential risks are easier to identify, he deems the latter to be more responsive if any risks manifest themselves.

Brooks Macdonald Defensive Capital

This fund also aims to achieve positive returns over rolling three-year periods. Managers Jonathan Gumpel, Niall O’Connor and Robin Eggar do so through a highly-diversified portfolio in terms of asset class and region.

A key feature of the fund is that many of these assets don’t require market growth to produce a return, meaning it can act as a good diversifier within a portfolio. That said, the managers will dial up or dial down how sensitive the fund is to market movements, depending on where they believe we are in the market cycle. Essentially, the fund is designed to provide investors with the stability of a fixed income portfolio, while maintaining exposure to potential equity gains.

Darius McDermott is managing director of Chelsea Financial Services and Fund Calibre