'Cash is not king'

"Cash can be a great asset, but it doesn't provide the real growth required for retirement," said Peter Brooke, head of Macro Strategy Investments at Old Mutual Investment Group SA (Omigsa).

Speaking at a presentation in Johannesburg on Tuesday, Brooke said a mixture of property, the bond market and even preference shares provided better options. This was owing to several major drawbacks of holding cash.

Cash has zero potential for capital growth, there is the detrimental effects of "tax drag", and South Africans don't have the self discipline to manage the cash with interest always finding itself into spending, Brooke said.

"Over the past 100 years, cash has produced a real return of only 0.8% per year."

Once inflation and tax has been taken into account, the after tax real return is a negative 1.6%," Brooke said.

"The problem is further compounded in that the more you save, the higher your tax burden becomes as you move into higher tax brackets," he said.

Figures last week bear out Omigsa's scepticism. The Association of Collective Investments (ACI) reported record inflows of R10.2bn into the money market unit trusts in the second quarter of 2008.

At the same time, there have been net outflows of R5.4bn from all other unit trust investments. "Understandably, fear has taken over and investors worldwide are fleeing the bear," said Brooke.

Bad at saving

South Africans are notorious for their inability to save and with many of them already cash-strapped, they are either failing to make regular contributions to their money market funds, or are failing to reinvest the interest they're earning.

Investor decisions to move from equity funds into money market funds is also short-sighted, said Brooke.

"One should be aware that many fund managers have been shifting toward cash exposure in funds they manage to mitigate risk and take advantage of the high yields now on offer.

"Investors are likely to have already experienced a switch towards cash in their existing investments," he said.

No asset growth

A core weaknesses with cash is that it can never show any real asset growth.

Instead Brooke has positioned a number of his portfolios with exposure to listed property, corporate bonds, and preference shares. They provide capital growth and protection and offer a dividend yield for investors.

This portfolio mix could provide a forward yield of roughly 11.4%, equal to the after-tax return of cash but also providing an underlying investment.

- Fin24.com