Investors are adamantly clutching onto their high cash holdings as uncertainty and volatility surrounding the global financial crisis (GFC) continues to cause anxiety.
This trend flags a significant shift in investors' attitude and appetite towards risk.
In its first quarter Australian cash report, Coredata's analysis shows cash remains the most popular investment for investors, with 25.8 per cent looking to rebalance to cash, down slightly from 27 per cent in the previous quarter.
This suggests that while expectations for cash have become more subdued, investors cannot see a viable alternative for investing their money.
"There is still a lot of feeling of uncertainty and obviously cash is considered to be a safe haven. It is conservative to put your money in the bank. So I think at the moment, until clients can see some clear signs that the global economy is recovering ... they're still seeing cash as the safest place," Coredata head of advice, wealth and super Kristen Turnbull tells ifa.
The reason is two-fold: certainty and safety in a volatile market, and the opportunity to stay nimble.
"I see customers who are wanting to stay in cash and fixed income because they believe there are opportunities to invest and they want to stay nimble and have their cash available," Westpac financial planner Roger Perrett tells ifa.
"But then you certainly do have other investors who have a level of fear and uncertainty and who want to stay in the asset class for security reasons."
But Macquarie Group head of cash business Peter Forrest notes some banks are offering competitive rates that may look quite attractive compared to alternative investments as cash doesn't suffer so much from volatility.
"I think, with the returns you can achieve in cash, having a proportion in cash achieving those higher returns makes sense for a lot of people. So, with terms deposits earning a rate in excess of 5 per cent, in some cases 6 per cent, that's actually a good return in comparison to alternative investments, which may have higher risk," Forrest tells ifa.
But it is no secret that although cash is still seen as a safe haven, it is certainly not the best place to invest money once the economy starts to turn around.
Investors are beginning to understand the advantage of taking on an additional level of risk in their portfolios.
"There is a growing realisation that holding cash for prolonged periods is far from optimal and investors are definitely looking to start taking baby steps towards gaining more exposure," BT Investment Management head of income and fixed interest Vimal Gor tells ifa.
BetaShares head of product strategy Drew Corbett agrees. "Volatility has come down quite a bit in the last few months. So those who feel that there is an opportunity are starting to dip their toe out of cash into [alternatives with greater returns but more risk]," Corbett says.
What can advisers do to help their clients?
While investors continue to clutch onto their high cash holdings, advisers are faced with the challenge of coaxing them into divesting a portion into high return assets for their own benefit.
If they hold cash as a long-term strategy, then inflation will eventually erode the value of that cash and clients are going to miss out on the upside of any financial recovery.
Investec head of distribution Gareth Bird says this will ultimately force advisers to focus on finding less risky investments for their clients.
"Their ultimate goal is trying to find the risk associated with a cash-line product, but maybe something that pays 2 to 3 percentage points higher than what the cash returns are. I think that's going to be a large need and drive from IFAs (independent financial advisers) that product providers will have to address," Bird tells ifa.
"I think that is where advisers are really going to start heading. I can't see us swinging back to the equity appetite that we used to have. I think that risk consciousness has changed and I think from what our advisers are saying, it seems to be a permanent change."
Some sources say other ways advisers can refocus advice is to target capital preservation, educate their clients or demonstrate good budgeting skills.
"It creates an opportunity for a well-informed adviser to differentiate themselves," Perrett says.
"I think in terms of the investment solutions available, there is certainly a lot more variety now and a lot more on offer. So the opportunity there is to get educated and start sourcing and availing yourselves with these solutions so you're well equipped to talk to customers about the different offerings."
Education and being aware of new solutions would not only set an adviser apart from their competitors, it should also help to maintain and build new business, he explains.
Turnbull says: "I guess the advisers are in a bit of a tough position to a certain extent because they're going to have to wait for their client to sit it out while making sure that they are aware of what their options are and the downside of keeping cash as a long-term strategy.
"My sense is what advisers are probably recommending their clients do is to average in so that they're dripping money into the market as opposed to putting in large lumps of cash in the market. And that would probably be the sensible approach, particularly for those who are a bit hesitant about that risk trade-off."
She notes there is interest from investors to look to growth assets, but they aren't likely to divest all their cash in one go.
"There is a little bit of dipping the toe in the water and seeing. But at the moment, people can see the expectation for cash is not as good as it was, but they still can't find a viable alternative that they are comfortable with from a risk perspective," she says.
Advisers encourage their clients to invest elsewhere, but at the same time still keep an ample amount of cash.
"It's not always prudent to be heavily invested in the share or property market and there are times when cash can be an extremely valuable asset. We would think that cash is still a sensible place to be investing, albeit it's not an easy time because cash rates are falling, property markets are stretched and equity markets continue to be volatile. It's certainly not an easy environment for advisers or their investors," Lanyon Asset Management portfolio manager David Prescott tells ifa.
"If you can keep cash when great opportunities are scarce, then when great opportunities present themselves, having cash will allow them to take advantage of that and that can be an extremely valuable asset."
A different approach should be taken towards cash investments. Looking at the way they are administering cash flows, how they are doing the day-to-day budgeting and which tools they are using to manage a client's investment are also key for advisers.
"What is the most important for advisers, particularly in uncertain times, is demonstrating the value of providing good budgeting for their clients," Forrest says.
"I think what is really important there is using a cash hub which allows them to demonstrate to the client that they are managing the full financial affairs of the client."
Gor says: "Managers need to have a robust process and have the ability and authority to de-risk portfolios when market conditions deteriorate. In terms of assets, a fund which invests predominantly in safe fixed-income assets but also has the ability to allocate to core Australian equities when appropriate is our preferred method of investing in these challenging times."
Outlook
There is continued uncertainty about the remainder of 2012. Risk is still very present and the cash market is expected to remain strong.
The trend for investors to be spooked into keeping a firm grip on their cash allocations isn't expected to reverse. True, there is a slight return of confidence, but not enough for investors to opt out of a significant portion of their cash allocations into a higher-growth and higher-risk investment.
Investors seem to be dipping their toe into growth assets, but at the moment that is as far as their confidence is expected to stretch.
"With all that uncertainty still out there in the world, people will most likely want to maintain high levels of cash. Yes people will need to move to growth assets, but you don't want to be moving into growth assets when they're going down," Corbett says.
It is going to take a long period of strong equity market performance before investors are tempted to start reinvesting.
"In the long term though, it is likely that we have passed the peak in equity weightings as the secular shift from equities into bonds continues in Australia as it has in the US and UK," Gor says.
Over the long term, holding cash, as opposed to bonds and other assets, is not the best option for risk reduction, so investors need to be aware they need to keep their options open.
"There will no doubt be a lot of pressure on clients and their advisers to dial up the risk profile of their portfolio so they can offset declining interest rates. I think those trends are likely to continue. I don't think the environment's going to get any easier here in Australia," Prescott says.
But given some sign of upswing in the markets, it makes sense for investors to at least start considering a reallocation, Turnbull says.
"They should really be thinking about reallocating some of their cash into a more viable long-term asset class," she says.
