The recent article I penned in Trustnet referenced the benefits of staying invested. I wanted to delve deeper into this point following the returns on cash, thanks to the rapid ascent on benchmark interest rates, increasing to levels one would expect to see from a balanced model portfolio. This has sounded a siren of temptation for equity and bond investors that, for some, may have proved too sweet to pass up.
This debate is particularly pertinent within sustainable investing as a ‘wall of money’ flocking to cash instruments has coincided with an ‘ESG backlash’ where assets have supposedly bled from sustainable investments. There are many flaws to this narrative – perhaps enough to create a future blog post!
The first thing to note is that for 2023, our Sustainable World (SW) balanced model returned 7.36% before fees with UK money market funds returning c4.75% (both before fees). This comparable underperformance occurred within the strongest year for cash instruments in the 21st century.
However, all stock and bond investments can go up and down and performance numbers often shroud a rarely linear journey. Although our SW portfolios finished the year with a fair return, at the close of October, it was looking like a tough year for sustainability focused investments. At that time, an investment into cash at the start of the year would have been looking shrewd. Alas, an 8.5% rally in the last two months of the year highlights the actual ‘risk’ of investing in cash.
Considering the absence of market risk due to the cash nature, the risk/reward profile of 4.75% is quite remarkable, though inflation should be considered. However, the risk comes when a long-term investor switches into cash, which involves timing the market. In fact, using cash instruments to satiate a balanced investor’s return appetite in 2023 will have required impeccable market timing. Then, to maintain a balanced return profile into 2024 and beyond, it would involve equally impressive timing on the way out. As developed central banks are looking to cut interest rates in 2024, which would directly, negatively affect the return on cash, back towards historical levels.
In fact, it is my belief that the time where ‘cash is king’ may already be behind us with the strong return from the start of November showing the benefits of remaining invested in stocks and bonds. This feeds into my main point which is that timing the market remains a difficult game, with history being our guide. Past performance is not a reliable indicator of future returns, but if you had invested in cash funds at the beginning of 2008 after an initial c4.5% return, you would have revelled amid a horrific year for equity markets where the S&P 500 touched -28%. However, this particular US equity benchmark would have had you back to positive, double digit returns by December 2010. Whereas remaining stoically in cash would have had you waiting for this accumulated return for a further 12 years. The risk therefore is not one of capital loss, but of the cost of opportunity missed.
This opportunity missed extends beyond financial repercussions. Sustainability investing is a tacit acknowledgement that one can use their capital to do more than increase their wealth. Therefore, being in cash would mean not being involved in the compelling impact stories I will be sharing with you in this blog.
Overall, frustrations with the performance of the sustainability market in previous years is market-wide, and we are no exception. I mentioned above the rally in sustainability investments in the last two months of ‘23, but I didn’t mention that just under half of this return was gained in three trading days. Showing just how fast things can change and are already changing. So, somewhat predictably, as the investment community derives considerable mileage out of it, I’ll take the following titbit for another spin.
It’s not about timing the market, it’s about time in the market.