Please note: this article is more than one year old. The views of our CIO team may have changed since it was published, and the data on which it was based may have been revised.
Our experts suggest ways to move out of cash, with the aim of improving returns while safeguarding your capital.
In the present late-cycle environment, our CIO team is continuing to recommend for clients to “Stay Invested But Hedge". Historically, the late-cycle environment has often delivered decent returns as well as higher volatility, so in our opinion it makes sense to stay invested – and thereby give yourself the opportunity to potentially benefit from any remaining growth – while taking steps to safeguard the returns your portfolio has generated over the long term.
Many investors allow their cash holdings to increase at this stage of the economic cycle, because they believe this will give them the opportunity to invest cheaply when the equities market enters its next downturn. However, history shows it is very difficult to ‘time the market’. As Christian Nolting, our Chief Investment Officer, points outs: “Holding too much cash could mean taking on higher levels of risk elsewhere in your portfolio to reach a given return target – quite apart from the problem of negative interest rates.”
So, how can you move out of cash? In this, the second in our four-part series exploring how to ‘Stay Invested But Hedge’, experts from around Deutsche Bank Wealth Management offer their ideas and explain how they can help.
Create a diversified unconstrained portfolio
Christian Nolting, Chief Investment Officer and Global Head of Wealth Discretionary
Consider investing surplus cash into strategies designed to preserve your capital, or diversifying into other asset classes according to your risk profile. In Wealth Discretionary we have a range of approaches that can help you do this, designed to deliver expected returns above those available on cash deposits, while guarding against market setbacks. The flexibility of an unconstrained approach will allow your portfolio to evolve in line with changing market conditions and correlations.
Invest into active fixed income
Romy Cuadras, Global Head of Fund Solutions
In the current market environment, there is a need to manage duration risk (the sensitivity of a bond’s price to interest-rate changes) as we move towards a higher interest-rate environment. Volatility can represent an opportunity to invest in actively managed strategies that use a flexible approach combining a diversified credit exposure and duration management. This approach helps to reduce the impact that higher rates will have in the value of your fixed income holdings.
Our Fund Solutions team can provide guidance to reinvest your cash and money-market fund holdings into:
- Floating Rate Note funds, investment-grade bonds designed to protect you against interest-rate rises, with variable interest rates that are tied to benchmarks such as the US Treasury Bill rate; and
- Flexible fixed income strategies that combine active duration management, to avoid interest rate risk, and diversified credit exposure.
The Fund Solutions product specialist can help to compare and contrast the various vehicles available to match them to your risk-return appetite.
Seek to improve yield on cash holdings while preserving your capital
Nick Stone, Global Head of Capital Markets
If you have an excess allocation to cash, our Capital Markets product specialists can help to identify opportunities to enhance yield – and/or alternative investments – while preserving some or all of your capital. We use a variety of research sources and counterparty relationships, as well as drawing on our own extensive experience, to identify such opportunities. And we can react quickly to market moves, thanks to our wide-ranging product capabilities and market knowledge. Using our open architecture, we are able to trade with a significant number of counterparties, giving you access to best-pricing and a wide variety of structures, pay-offs and bespoke solutions, tailored to your return and risk expectations.
For further guidance on how to ‘Stay Invested, But Hedge’, try watching the other videos in this series:
Alternatively, you can download a full copy of our ‘Stay Invested, But Hedge’ CIO Insights report here.