Is cash the great neglected asset class of our age? For most investors, cash can seem like a curse. Even though we work ourselves into the grave to make the stuff, cash is doomed to sit idle in the bank earning next nothing as inflation eats away at its “value”.
But for some strategists, such as Dylan Grice at French bank Société Générale (SG), that idleness is cash’s greatest virtue: it offers the best protection for your portfolio against unpredictable events.
In a recent paper, “The Case for Cash”, Grice repeated an argument made by James Montier, his predecessor at SG: cash has “a hidden optionality derived from its relative stability”. Or, in plain English, it is the only asset class that gives you the chance to buy cheap assets when markets dive.
Grice also points to historical analysis that suggests cash hasn’t been that bad a performer – even during inflationary episodes. He says: “The real total return to cash in the 1970s was actually on a par with bonds and equities – though, on a risk-adjusted basis, cash was much better than either, because it was more stable.” He also argues that the “hidden optionality” – the ability to purchase cheap assets – gives cash added value.
Related link: Cash is king