Emma Wall: Hello, and welcome to the Morningstar's series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar Investment Management's Andrew Lill.
Hi, Andrew.
Andrew Lill: Hi, Emma.
Wall: So, we are here today to talk about cash. It's an asset class that has a bit of a bad rep when it comes to investing because as interest rates are low as they are and inflation as high as it is, or at least rising, cash offers a negative real rate of return and that's investing 101 but it doesn't take into consideration market conditions which suggest, you say as a contrarian investor, that actually now might be a good time to hold cash?
Lill: Well, that's right. Clearly, cash is not an asset that a long-term professional investor wants to have in their portfolio forever; however, cash does have two great advantages going for it. Number one is that liquidity and optionality to invest quickly when markets become dislocated and there's a great opportunity to invest overnight. And two, right now, even though most investors are chasing those returns of the equity markets, in general, the reward that you get for taking investment risk is much lower than it has been for the last decade. Therefore, in that regard, you are better off taking lower risk and getting that reward that you do for cash right now.
Wall: It basically all boils down to valuation, doesn't it? I know Morningstar Investment Management, contrarian, valuation-driven investors, what you are basically saying is, equity markets look pretty overvalued and cash might be even a safer place to be?
Lill: Well, that's right. So, a valuation-based investor focuses on the future rather than the past, thinks about what are the asset classes that are going to be able to pay off the best from this day given the valuations we have today going forward. And we think that actually particularly in the US where cash rates are rising quite quickly, there's a much better opportunity right now than investing in US equities even though for most investors they think that U.S. equities are the place to be right now. That's what I mean by contrarian; thinking about the future and not the past and being prepared to be different.
Wall: And then, I suppose what you are waiting for is for those markets to correct, be it because of a macroeconomic event or a central bank policy or even just markets overinflating and collapsing, and then you are going to put that cash to work?
Lill: Well, that's certainly Plan A. So, Plan B will also involve – well, let's say that other markets compared to the US become a lot more attractive, then actually even though the US doesn't correct, we can put that cash to work in other markets. And we find that while generally around developed markets, they move in unison within markets, particularly in sectors, there tends to be quite a large dispersion between the best-performing sector and the worst-performing sector in any period. And if you are investing in sometimes the worst-performing sector, but it has good fundamental strength going forward, it offers the best return. It's actually better to invest in poorer-quality investments when they are priced to be very poor than it is to invest in good-quality investments when they are priced to be very, very good.
Wall: And of course, you are sitting here as a professional investor, people watching this are retail investors. It's easy for you to say be nimble, have cash ready, invest on the dips because you are sitting waiting for those dips. For the individual investor, timing the market, that is near impossible. Could you argue that it would be better to drip feed over a long period of time on a regular basis, so you almost accidentally catch those dips?
Lill: That's certainly one way of doing it. And you know, all we would say is that if you watch kind of the most successful investors over time, the likes of Warren Buffett and others, they tend to be following that mantra of buy when the fear is highest and effectively sell when things look a lot more kind of comfortable. And so, if you start to sell when the market looks very strong and comfortable, you are effectively doing the same thing as a Warren Buffett.
Wall: Andrew, thank you very much.
Lill: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
