£260bn remains in cash despite pounding: Woodford Investments

£260bn remains in cash despite pounding: Woodford Investments

More than £260bn remains invested in cash despite the fact that low or, in some cases, negative interests and higher inflation meaning that it is, in many cases, costing investors, rather than protecting them, according to Woodford Investment Management.

With a figure that is is greater than the Gross Domestic Product (GDP) of  (£223bn, as at 2016), Mitchell Fraser-Jones, head of investment communications at Woodford Investment Management, said that while there is a still a place for cash in a balanced portfolio, the over-dependency of some investors on cash holdings is, perhaps, doing their portfolios no favours.

“There is a saying in the world of investment: Cash is king!,” said Fraser-Jones. “In our investment approach, cash and cash flow generation, will always have an important role to play. Without cash, a company cannot pay its dividend and without increasing cash flow, it cannot grow that dividend. In that respect, cash is indeed king and it always will be.

As the graphic, pictured below left, highlights, in real terms £10,000 invested 10 years ago would actually be worth just £8631.

Cash crown slipping

But in other respects, according to Fraser-Jones, cash’s crown has somewhat slipped in recent years. With interest rates collapsing in the aftermath of the financial crisis and staying at ultra-low levels ever since, returns on cash deposits are “negligible”.

“Nevertheless, according to the Bank of England, a whopping £260bn is invested in cash ISAs in the UK. The cash ISA has been a very popular product for years – the ability to hide a chunk of savings away from the tax man every year has proved irresistible to thousands of investors, as did the ability to earn a reasonable level of tax-free interest. The money invested in cash ISAs remains tax-free – but these days, it is also pretty much return-free!

As Jones outlined in his blog, published on the Woodford Investment Management website, in real terms, the value of cash held in ISAs has been steadily eroded by inflation.

Cash has produced a very modest positive nominal return over the last 10 years but, adjusting for inflation, the real return on cash has been negative, as the graphic, pictured left, highlights.

Fraser-Jones added that the company expects that interest rates will remain low for several years to come and so, although the prospect of inflation moving sustainably higher also looks remote, “we don’t think there will be any respite for cash savers in the medium-term”.

“Why the inertia?,” he asks. “We suspect that the holders of cash ISAs are reluctant to take on more ‘risk’ by moving the money out of cash and into other asset classes. Furthermore, it is plausible that many investors do not realise that they can move their money out of a cash ISA and maintain the tax-free status of their savings”

Fraser-Jones points that the company has previously highlighted that the perception of equities as a ‘risky’ asset class, depends hugely on your definition of risk and your investment time horizons.

£260bn figure

“On an individual level, some people’s savings are potentially not working as hard for them as they could,” he added. “On an aggregated level, however, £260bn is an enormous amount of money to be tied up in assets which are not earning a productive return.

“It is conceivable that, if a decent amount of money was transferred out of cash ISAs towards the UK businesses that need it most, we could see a long-term economic benefit. That is after all what the stock market is supposed to do – perform the socially useful function of matching the savings of the British public to the best long-term investment opportunities.”

In summary, Fraser-Jones added that cash has a place in everyone’s portfolio, but it should form part of that portfolio, not dominate it.

“There are alternatives, and some of them, UK equities included, are not as risky as you may think, as long as you’re prepared to think long-term,” he said. “Not convinced? Well that’s fair enough but if you’d like to look into this topic some more, there are many worse things that you could do than seek financial advice.

“There is a network of excellent (and independent) financial advisers around the country who specialise in making sure that your savings work as hard as they can for your own unique circumstances.”

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Gary Robinson

Commercial Director, Head of Video at International Investment.