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Cash is king again

Cash outstripped UK equity and bond returns over 2007 and a weak UK equity market means that the 10-year return on equities is now the worst since 1967-77, the annual Barclays Gilt & Equity (2008) study reveals.

The returns on cashlast year marked the first time that real cash returns outstripped all other major asset classes since 2001 – and that was amid one of the worst bear marketsseen in the past century.

The study goes on to point out that the 10-year annualised real rate of return from cash is not much lower than that achieved by either of the major asset classes, with Barclays reporting a real return of 2.5 per cent for cash compared with a 3.1 per cent gain from UK equities.

This was significant as the weakness seen in 2007 dragged down the annualised figures for UK equities and stripped them of the mantle of being the leading asset class over the past decade.

That accolade now goesto corporate bonds, which post an annualised 10-year return of 4.7 per cent. Gilts also now fare better than equities over the 10-yeartime horizon examined, gaining an annualised 3.3 per cent in real terms.

All this means the 10-year return on UK equities is now the worst since the 1967-77 period, which included anoil crisis and the initial stage of stagflation.

The Gilt & Equity study, which examines market returns since 1899 and has been published annually since 1956, breaks down the returns of the past year even further and while it does not make them look any prettier, it does note that 2002 remains the worst year in recent history for equity returns.

By examining the real returns of equities, bonds and cash achieved in 2007 and ranking them by decile against historic figures, with first decile representing the best 10 per cent of the his-tory and 10 the worst 10per cent, 2007 gets a seventh-decile position, compared with its fifth ranking for 2006. This compares with 2002, where UK equities received the lowest rank of 10.

Considering the fact that while the markets were volatile last year and outflows from investment funds, particu-larly in November and December, were strong, equities did end the year in a positive note – making Barclays’ figuresall the more surprising.

Smart institutional investors saw the writing on the wall early on and headed for cash as early as June of last year, with the Investment Management Association’s statistics showing in that month that the money market sector was the most popular among institutional buyers – compared with the property-heavy specialist sector for retail buyers.

Retail favoured the cautious managed sector in the final two months of 2007 but money market funds rose to the top again in November and December for institutional sales.

In December, and per-haps what could be considered late to the party, the UK money market sector was ranked the third-best-selling retail sector, according to the IMA’s monthly statistics, with net sales of £82.5m.

Around £17.9m of that figure came from the directpublic and, through that distribution channel, money market funds were far and away the most popular – with the next best selling sector , unit-linked gilts, sellingjust under £3m.

Although money market funds make up a very small percentage of the overall UK fund market, at just 1.1 per cent of the total funds under management which is up from 0.6 per cent almost 10 years ago, sales in this area accelerated rapidly overthe past year.

The IMA figures show the fluctuations in the popular-ity of money market funds over the past decade, with some years posting as little as £20m in total sales (retail and institutional) and many years where there were greater redemptions than purchases.

The net sales figures in this sector for 2006 and 2007 show an impressive jump past the £1bn mark, more than double that of any other year going back to 1998.

When retail sales aloneare examined, the number comes down significantly but the general trend remains. In 2005, net retail sales of money market funds was only £12m, down from£50m in 2004 but close to the £15m seen in the depths of the bear market in 2002. That compares with the £253m seen in 2006, which rose sharply again last year to exceed £420m.

But all is not gloom for equity investors in the 53rd Gilt & Equity report and, asin previous years, the study serves to highlight some key aspects of equity investing – predominantly the importance of reinvesting dividends.

The report shows that the value of £100 invested at the end of 1899 without reinvestment of income would be worth just £209 in real terms today and some £13,500 in nominal terms. That figure is significantly higher -more than £1.6m in nominal terms and £25,277 in real -if the dividend income was reinvested.

The impact upon a gilt portfolio is less in absolute terms but the ratio of the reinvested to non-reinv-ested portfolio is still more than 300 in real terms.

With dividends makingup such a significant port-ion of equity market returns, it is little wonder the UK equ-ity income sector remainsso popular these days and continues to be a haven in times of trouble.

The picture for the dividend market also continues to look bright. Barclays Capital points out that the five-year average growth rate for dividends was boosted by an 8 per cent rise in 2007.

Considering the fact that, in the heady tech boom days, between 1997 and 2001, dividend income fell by a cumu- lative 15 per cent, it would appear the popularity of dividends has continued to power ahead, even in a year where the markets struggled.


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