Schroders said that cash has become more attractive in recent high interest rate environment. While it does have its merits, it also has its drawbacks and other asset classes can be used in conjunction with cash reserves. Cash is not the seemingly 'low risk' asset class for many investors. Investors seeking yield can choose other asset classes to mitigate some of the downside of cash, without taking on too much of the potential risk.
Last year, many investors were attracted to the high interest rates on cash. In the US and UK, rates on deposits reached 5%, in Europe 4%, a huge contrast to the near-zero rates for most of the last decade. Cash is now providing positive real returns as well as liquidity and nominal value storage.
With recent deflation, cash rates are now higher than inflation. This is not surprising but may be temporary. Central banks around the world have been waiting for inflation to be controlled before reducing interest rates and once this is confirmed, cash rates are likely to fall with inflation.
Cash does not provide a stable or predictable ongoing yield for long-term investors and cash rates will change over time. In contrast, bonds can lock in a coupon rate for a longer period. For example, the coupon rate on investment grade corporate bonds is around 5-6% with an average maturity of nine years and a low default rate. This may be an attractive investment option for long-term investors who are not too concerned about short-term price volatility.
Equities outperform bonds in the long run and bonds outperform cash, but the short-term performance may vary. Past performance is not a guide to future performance and is not necessarily replicable.
Equities are more volatile than bonds and bonds are more volatile than cash. However, long-term investors should be careful not to overreact to increased volatility. For yield-seeking investors, they may not be too concerned about a short-term fall in prices. Companies are generally less willing to cut dividends so as long as income is being received, investors are unlikely to feel the immediate impact of a short-term underperformance.