Five funds where cash is king

Given that both stocks and bonds have fallen in tandem in 2022, investors may be considering cash as a defensive asset. Dzmitry Lipski explains how to use cash in your portfolio.

It has been a challenging year so far for investors, with both equity and bond markets unusually falling in tandem. High inflation and interest rate rises have made it a challenging backdrop for the two major asset classes. 

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As a result, investors may be more cautious than usual, and therefore be wanting to protect returns earned over the years. A meaningful cash allocation can help investors with this, providing a solid buffer for a portfolio. 

And, when the time is right, having “dry powder” allows for allocations to other riskier asset classes such as equities that focus on potential growth over time.

‘Cash is king’

Cash investments play an important role within a portfolio by providing greater stability and diversification.

Despite high inflation levels meaning that cash returns are negative in real terms, there are some good reasons why you should hold at least some cash other than for emergencies and liquidity. 

Alongside asset classes such as government bonds and gold, cash is a safe-haven asset. These assets tend to hold their value during periods of market volatility as they generally have a low or negative correlation with equities.

As interest rates increase over time, cash investments would be expected to see an increase in yield, as they have historically during rising rate environments. However, if inflation remains elevated cash returns will continue to lag in real terms. 

How much should I allocate to cash?

When making cash allocation decisions, investors need to consider their investment objectives, time horizon and risk tolerance. An investor with a long-term investment horizon and high return objectives may want to hold only a relatively small cash position in their portfolio. For those with a shorter-term time horizon more cash may be appropriate.

However, as we move into a more uncertain market environment, it makes sense for investors to focus on capital preservation and limit volatility by maintaining a reasonable cash buffer within a well-diversified portfolio.

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Investors looking for a one-off solution should consider multi-asset funds that are able to invest across different asset classes, including equities and bonds, providing a greater degree of diversification.

Defensive multi-asset funds, often characterised by large cash allocations, are better placed to protect capital when markets undergo a downturn. But be warned, they typically lag the wider market during rally phases.

We have selected five high-quality multi-asset funds with cash allocation of more than 10%. Each fund is either in interactive investor’s rated lists, or is a member of our five model portfolios.

Source: Morningstar. Total return figures to end of June 2022. * Fund was launched in December 2019. Past performance is not a guide to future performance.