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Cash at risk of losing ‘safe haven’ status as inflation bites

Cash at risk of losing ‘safe haven’ status as inflation bites
  • 70% of financial advisers think the projected rise in inflation will encourage their clients to consider switching capital out of cash
  • 64% think low savings rates coupled with rising inflation will change client perception of cash as a ‘safe haven’
  • RPI plus a percentage target seen as the most appropriate performance benchmark 

Seven in ten (70%) financial advisers predict an increasing number of clients will consider switching some of their capital out of cash and into other asset classes in response to rising inflation and its impact on eroding the value of their cash savings.

According to a new study1 commissioned by Investec Wealth & Investment (“IW&I”) among 108 financial advisers, almost two thirds (64%) believe that the continuation of low rates on cash deposits during a time of rising inflation will alter clients perceptions of cash as a ‘safe haven’.

CPI inflation has risen sharply over the last year from 0.3% in February 2016 to 2.3% in February 20172 while over the same period, the FTSE 100 has grown by roughly 22%3.  Moreover since June 2016 and the Brexit vote, average Cash Isa rates have halved from 0.87% to 0.43%.

In light of this, IW&I’s study reveals which performance benchmark resonated most strongly with the respondents’ clients.  The most popular benchmark supported by 43% of advisers is RPI plus followed by Bank of England base rate plus (33%) and CPI plus. ARC performance data and discretionary fund manager (DFM) internal performance indices were the fourth and fifth most popular benchmarks respectively.

Mark Stevens, Head of Intermediary Services at Investec Wealth & Investment, said: “Whilst interest rates had remained at historic lows for eight consecutive years alongside negligible rates of inflation, cash has retained its reputation as a safe if rather unexciting asset class. However, with inflation rising significantly in recent months, many advisers believe their clients’ patience with cash will start to wear thin as they see their deposits shrinking in real terms.

“It’s likely that as clients become receptive to moving higher up the risk ladder in order to generate positive returns, the role of the adviser becomes even more important. Aligning their clients’ risk appetite and capacity for loss, whilst optimising the client’s investment strategies is not new, but given the increasing role that inflation will play in determining returns, client expectations will require careful consideration and management. It is not surprising that RPI plus emerged as the most popular benchmark with many clients as it is a familiar and simple measure. However this creates another opportunity for advisers to work closely with their discretionary investment manager partners to deliver inflation-adjusted returns for those investors with large a portion of their assets held in cash.”

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