Strategists are urging investors to allocate more of their portfolios to cash during these volatile times, as interest rate hikes mean it’s now offering higher yields. “Cash was king” last month, Bank of America said in a Sept. 1 note, as most asset classes — such as stocks, bonds and even commodities — posted losses. “Cash (which now yields 2.9%) was the only major asset class that gained (+0.2%), likely outpacing [consumer price index] again,” Bofa strategists wrote. For John Petrides, portfolio manager at Tocqueville Asset Management, “cash, for the first time in a very long time, is offering a competitive option relative to bonds and stocks if you are worried about the near term.” The goal is capital preservation, because of this “very, very risky” market environment, added Eric Lonergan, macro fund manager at M & G Investments. His firm has been shorting stocks and bonds, he said, adding that hedge funds should be going into cash. Read more Wall Street pros issue warning on stocks. Here’s what they say to buy instead These outperforming stocks could be safe bets right now — and analysts give them serious upside In fact, the performance of mutual funds has been aided by a higher cash allocation this year, according to Goldman Sachs. At the start of this year, mutual funds allocated 1.5% of their portfolios to cash — the lowest level in at least 30 years, Goldman said in an Aug. 25 note. In June, however, fund managers increased their allocations to cash more quickly than during any six-month period since the second half of 2008, and now have 2.4% of their portfolios allocated to cash, or $208 billion. “Mutual funds have increased their allocation to cash this year at the fastest rate since the Global Financial Crisis, aiding their outperformance,” Goldman’s analysts wrote. Cash performance Not all cash is created equal, however, according to Morgan Stanley. Among the highest yielding options are six-month Treasury bills, which are yielding around 3.1% — the highest since 2007, according to Morgan Stanley. They “offer 157bp [basis points] more than the dividends of the S & P 500, 21bp more than U.S. 10-year Treasuries and just 60bp less than the U.S. Aggregate Bond index,” strategist Andrew Sheets said on Aug. 21. “For USD investors, cash has ceased to be a material drag on a portfolio’s current yield.” Tocqueville Asset Management’s Petrides told CNBC that, “if you are cautious about the next 6-9 months on the economy and/or financial markets … a 6-month T-bill [that] yields near 3% — in a tax deferred account — seems like a reasonable asset allocation.” Morgan Stanley said that holding the U.S. dollar looks “relatively attractive,” as it offers a high current yield as well as liquidity. “[It] offers a better 12-month total return than our strategy forecasts imply for U.S. equities, U.S. Treasuries and either U.S. [investment grade] or [high yield] credit (with considerably less volatility),” the bank’s analysts said. The dollar index , which measures the greenback against a basket of currencies, hit a fresh 20-year high Monday. It is up around 14% since the start of the year. For how long? If you’re interested in getting into cash, for how long should you deploy the “cash is king” strategy? Tech investor Paul Meeks told CNBC’s “Squawk Box” in late August that he has built a cash hoard of more than 20% in some of his portfolios, as he waits for tech valuations to pull back before piling back into the sector. While Petrides said that cash “works until the market changes.” “At that point the yield curve will steepen, economic growth will start again, and investors can once again feel comfortable owning long duration assets such as growth stocks or longer maturity bonds,” he added. — CNBC’s Sarah Min contributed to this report.
