Retirement funds should use their cash allocation as a tool to protect retirement fund members against current market volatility.
This is according to Sean Segar at Nedgroup Investments who says the cash allocation of a retirement fund provides valuable diversification, additional liquidity and importantly, a parking place for assets in times of market turmoil.
“Parking in cash is a particularly valuable tool for retirement funds looking to ride out the volatility in the markets at the moment. An unexpected market downturn could have lifestyle-changing implications for retirement fund members, particularly those close to retirement. Therefore, by increasing the portion of assets invested in cash, members are afforded a greater degree of protection while markets settle,” he says.
Segar points out that the role of cash is not to generate above average returns, but to act as an adaptable tool to protect retirement funds against particularly volatile periods. “The risk and volatility with such a money market investment is very low and the capital for that particular period is virtually guaranteed. For members of retirement funds, particularly those close to retirement, this is of crucial importance. Retirees are particularly vulnerable to volatility.”
However, Segar stresses the importance of ensuring that the cash portion of a retirement fund is still generating yield.
“Lazy cash is wasted cash. Although cash is not a high-growth asset, it should still be put to work and over a longer term. The yield generated from hard-working cash over the long term can be significant and could make a real impact on a retirement fund,” says Segar.
The argument for retirement funds utilising short duration unit trusts for their cash building blocks is very compelling.
“Using these pooled vehicles offers higher yields via professionally managed portfolios with a spread of counterparties, all in a regulated environment with independent trustees, better liquidity and daily unit pricing. Such vehicles are highly convenient and offer lower fees. Unit trusts are not just for small funds. Even very large retirement funds will benefit from using pooling for their cash segment.”
Segar says by strategically allocating cash, retirement funds can also mitigate some of the effects of rising interest rates for members. “Investors in pooled investment vehicles like the Nedgroup Investments Core Income Fund will enjoy the benefits of the rising rates as the yield of the portfolio rapidly adjusts to market yields.”