Fund managers should wake up to cash
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Peter L Bernstein asked in 1989, “Why is it that the conventional allocation of portfolio assets is between stocks and bonds? Why is cash the portfolio’s step¬child, held in lesser amounts and used only as a buying reserve for the two long-term assets?”
He concluded that bonds were over-rated: “Cash tends to have a lower expected return… [but it] can hold its own against bonds 30% of the time or more when bond returns are positive. Cash will always win out over bonds when bond returns are negative… The logical step... is to try a portfolio mix that offsets the lower expected return on cash by increasing the share devoted to equities. As cash has no negative returns, the volatility might not be any higher than it would be in a portfolio that includes bonds... Bonds have no place in the portfolio by default.” But cash does.
In 1989, when Bernstein wrote this, longer-term Treasury bonds yielded 8%. They now yield 4.5%-4.75%, so his warning is more relevant.
Fund managers tend to feel obli¬gat¬ed to avoid cash – being fully invested is the sort of virility symbol that plays well in the industry. But given bonds are overvalued and rates are rising (in Europe, soon, and the US, if not the UK), it’s time for them to start worrying less about virility and more about not losing money.
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