Attention fund managers, wealth managers, independent financial advisers: I have bad news. It seems that your life's work rather like mine might have been in vain.
I've noted before that cash is horribly underrated as an asset class. Most of the studies done in the industry on the relative returns of equities and cash are horribly weighted towards equities: they rarely include the costs of holding shares (which most of us do via funds) and they always use the yield on Treasuries as a proxy for the interest on cash when most of us barely know what a Treasury is.
If we hold cash, we hold it in a nice best-buy deposit account at the bank. What I've never done is attempted to quantify these two things for you. Enter consumer champion Paul Lewis. Here you will find his research on "active cash" which could prompt any average fund managers with their client's real interests at heart to post them a cheque and a phone number for a building society.
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It turns out that in most time periods since 1995, putting your money into the highest interest deposit account on the market every year would have yielded a higher return in the UK than putting it into a FTSE 100 tracker. There's a lot to argue about here and the fund management industry has wasted no time in getting started. After all, the last thing they want is for punters to think holding cash is OK: no one makes management fees on that (although I know several firms are working on ways to have a go at it).
The first thing to point out is that over the whole period, the FTSE tracker did a bit better overall (returning a compounded 6% a year versus 5% for cash) and that it also did better in the few periods longer than 18 years. So the industry can at least say as Lewis does that over the very long term shares are a little better than cash.
The second is that Mr Lewis's research makes an important behavioural assumption: that investors are too supine to move from the HSBC FTSE 100 tracker he uses for the comparison for the entire 21 years in question, but that savers have the energy to move to the best-buy account on the market every single year. That makes his comparison a little bit apples and oranges: a lazy and utterly uninquisitive equity investor takes on a fantastically energetic and research-oriented cash depositor.
If the former had switched every year to either the cheapest tracker or the one following the best-value part of the market, things might have been different. And had the latter shown the usual level of savers' inertia (80% of easy access accounts in the UK have been held for over three years, according to the Financial Conduct Authority) they might have been very different.
Next comes the obvious point that the past is no guide to the future and given the strange times we live in, the past 20 years are very unlikely to be much like the next 20. The HSBC FTSE tracker that Mr Lewis uses is one of the few options available for long-term comparative purposes there haven't been that many around since 1995. But it is hugely cheaper to hold now than it was 21 years ago (most trackers cost well over 1% back in 1995 the HSBC fund is now 0.18%).
If we do these calculations again in 20 years (by which time the cost of the average tracker on the market will probably have fallen to well under 0.05%) that difference in the cost of investing will make it much harder for cash to come up trumps. To underline my point, as the cost of investing has fallen (and hence the potential return has risen) returns from cash have all but collapsed.
For most of the time that Mr Lewis has covered, UK interest rates have been positive in real terms: you have been able to get more interest on your cash every year than you lost to inflation. That's not the case any more. In 2007, our real interest rate was over 3%. Today it is more like 0% and even if you get a best-buy account it isn't much more than 1%. If things stay that way, barring a proper crash, equities which yield on average about 3.5% in the UK should continue to look relatively better than they have in the past. Note that caveat by the way. The global financial system is very unstable (as are global politics) and a proper crash is very possible, at which point everyone who doesn't have cash will really wish they did.
Finally, we can't ignore active fund management. I am often pretty down on active fund managers here (and, just to be clear, I'm going to continue to be pretty down on most of them). But good versions of active management do exist for those prepared to put some effort in. The Association of Investment Companies, which represents the investment trust industry, quite rightly points out that the average investment company has outperformed cash as well as the FTSE 100 "by a substantial margin over 3, 5, 10 and 21 years" for example.
That brings us to the end of the basic objections to the "cash is king" premise (though I expect the industry can think of some more if they put their minds to it). But however many they come up with, they won't be able to completely defeat the key point: that the opportunity cost of holding cash is very much smaller than we all thought it was.
So while cash shouldn't be the only thing you have, or the thing you have for the very long term, there is no shame in holding quite a lot of it as long as you make sure you aregetting the best interest rate youcan.
And all this is yet another warning shot across the bows of our still oddly complacent fund management industry. If it reads Mr Lewis's research properly, it should understand that it isn't just competing with the (cheap) passive part of the funds market, it is effectively competing with (free) old-fashioned cash deposits too. That should make it nervous.
This article was first published in the Financial Times
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