Holly Black: Welcome to the Morningstar series, "Ask the Expert." I'm Holly Black. With me is Mike Coop from Morningstar Investment Management. Hello.
Mike Coop: Good morning, Holly.
Black: So, we're here talking about cash today. There's lots of uncertainty in the market, lots of volatility. And I think a lot of people are quite tempted to take their money out of the stock market and just shove it under the mattress. What's your take on that?
Coop: Yeah, we've seen people are nervous in relation to U.K. shares because of Brexit. And so, it doesn't surprise us that that's happening. But I think before people take all the money out of assets, they need to think hard about the role cash plays in their portfolio, they need to hard about cash relative to other things they can invest in like bonds and shares.
Black: So, something we've seen in flow data in the last few months is money coming out of equities and going into money market funds maybe that's perceived as a safe haven. Is that a good choice?
Coop: Well, you know, I think cash does play an important role in portfolios for people who need liquid safe assets that they can quickly get their hands on. Panicking about conditions in the markets probably isn't a great idea. And generally, we would – in the strategies that we run, we set ranges for equities based on the risk levels that clients have chosen. And we vary the allocations based on the reward for risk that equities and bonds and cash offer. So, I think it's not the right time for anybody to be selling all their assets. You need to have a disciplined strategy. But I would say that there's probably more of a role for cash now than typically we've seen for the last few years.
Black: It guess one of the problems is, historically you'd may be turn to government bonds at times of uncertainty. But the yields are so low, even negative in Europe, so does that make them less attractive to you?
Coop: That's a really good point. So, it's really challenging at the moment to find assets which give you a return above inflation without having excessive risk. So, when we look at the UK, for example, at the moment, you're getting about 0.7% on a 10-year UK government bond, which is well below any measure of expected inflation, and cash rates are around that level. So, gilts to us are pretty challenging. When you're putting your money into UK fixed income, you might be thinking it's safe. But what's happened over time is that the government has issued more longer-dated bonds. And as the yields have come down, what happens is that bonds are actually a riskier proposition, because if interest rates go up, they'll sell off more. So, gilts to us – you know, we've found it difficult to find good investments in UK fixed income and the riskiness associated with gilts makes them less attractive. So, in that context, cash probably looks better than it would normally do relative to UK fixed income.
Black: And I guess another problem we've got is the UK stock market is so out of favor and so many investors find it unappealing that again, if they can't turn to bonds, where do they go?
Coop: Yeah. So, for us, we have found that UK stock market offers better value than many other stock markets, because people are so concerned about Brexit, that they've stayed away from stock market or have sold down in some cases. So, we thought that within stock markets that you can access, it looks relatively better than most. Having said that, globally, we find that markets in general are overvalued and the most expensive market, of course, is the US, which is the most important market globally. So, what that means for investors at the moment is that future returns from equities are going to be considerably lower than they've been used to having. That's still going to give them a good enough return to warrant having equities in their portfolio. But we think that it also heightens the case for having some cash because some of them are considered very expensive. History shows us that when the markets get very expensive, they're more likely to fall in price than just to have a very stable low return. So, cash does give you that dry powder to be able to pick up bargains when that happens.
Black: So, how are you thinking about cash in the portfolios at the moment? Is it an important time to have some or are people overreacting?
Coop: So, I think cash has more of a role to play now than would normally be the case because equities are somewhat expensive, and bonds are very expensive. And cash gives you that option of being able to pick up things when there's a bargain. But it's not an asset you want to hold a big amount of for long-term investors. So, in our portfolios, in the portfolio that we run, which are the designed to take less risk or have shorter time horizons, we typically hold more cash than we normally would. And we think that that has allowed us to take advantage of opportunities as things were sold off.
Black: Super. Well, thank you so much for your time.
Coop: My pleasure. Thank you, Holly.
Black: And thanks for joining us.
