During 2023, many investors swapped their stocks and shares ISAs for cash options. But as interest rates peak, will cash retain its crown in 2024? Nick Henshaw, Head of Intermediary Distribution at Wesleyan, explains all here.
The new year is a natural time for us all to reflect on the year that has passed and look to the opportunities that the year ahead might hold. Compared with the outlook this time last year, I would say that there are growing grounds for optimism.
During 2023, investors understandably retreated from capital markets as returns have continued to be poor and volatility has persisted. At the same time, interest rates continued their upward march, with five increases throughout the year - taking the base rate from 3.5% at the start of 2023 to 5.25% today*.
As a result, large numbers swapped their stocks and shares ISAs for cash ISAs. This was a perfectly understandable reaction to rising rates by defensive and cautious investors. But received wisdom now is that interest rates have peaked.
Tipping point
The latest signalling from the Bank of England is that lower interest rates are now on the way, with some commentators expecting the first cut as soon as May.
Another encouraging fall in inflation in February only lends this argument even more credence, and significantly weakens the case for holding cash.
So, what next?
History tells us that cuts to interest rates are likely to act as an immediate stimulant to financial markets. It’s easy to imagine that growth in capital markets will be significantly boosted when interest rates fall, or even if enough people anticipate that a fall is imminent and sentiment switches.
The question is, when do I put risk back on the table to get a better return, and how much risk is acceptable for my clients? There’s no doubt that the potential for volatility persists. Ongoing wars, unpredictable oil markets, a general election and upside inflation pressures are all in play and can move markets.
Risk-averse advisers might be tempted to resort to a tried-and-tested pound cost averaging strategy, drip feeding contributions into equities in regular instalments. At the other end of the spectrum, the more bullish may decide to go all in before capital values start to rise.
Re-evaluating risk
But there is a middle ground. Smoothed funds invest across a diversified range of asset classes and employ an actuarial mechanism where, during times of strong fund performance, some returns are held back. These are then re-distributed during periods of weaker fund performance, reducing volatility and moderating risk.
The actively managed Wesleyan With Profits Growth Fund, for example, invests in UK and international stocks, government and corporate bonds, property, cash and more. It is also the first smoothed UK With Profits fund to be made available on multiple independent wrap platforms, making it easy for advisers to access and combine a client’s investment portfolio.
Wesleyan’s unique smoothing mechanism means volatility is extremely low, with a Fund FE Info score of just 9 out of 100 (as at 27 March 2024)**. Yet, it has delivered a cumulative return of 70.29% over the last 10 years (as at 29 February 2024)***.
Wesleyan’s fund is managed by an award-winning**** in-house Investments team consisting of Fund Managers, Property Managers, Analysts and a Sustainable Investment (SI) Team. With over 150 years of combined experience between them, the team continuously strives to outperform the markets.
Wesleyan has been helping people reach their financial goals for 182 years, and a large part of that longevity is down to the fact that they are a capitally strong mutual. Without shareholders, it has the scope to invest with a long-term approach, removing the pressure to pursue short-term gains.
It also gives them the opportunity to control the amount of reserves they hold, directly impacting their financial strength.
A history of delivering consistent long-term investment returns means Wesleyan is well placed to support the needs of financial advisers and their clients, especially in today’s challenging market conditions.
Returning from cash
Smoothed funds can be an effective way for investors who have become more risk averse in recent years to dip a toe back into equity markets.
While no one can predict the future with certainty, I’ve certainly noticed an increased optimism in investment houses and the mood music around equities is becoming noticeably more upbeat.
This should be your cue to re-evaluate your clients’ investment strategies. For many, the decision to go to cash will have been a short-term reaction to a period of elevated uncertainty.
Now that uncertainty has eased, it could be time to take on bit more risk. And smoothed funds can be a stepping stone, enabling clients to invest in real assets that can outperform inflation.
Cash may have been king in 2023, but in the medium to long term, it will inevitably lose its crown.
Please note that past performance is not a reliable guide to future performance and the value of your investment, and any income can go down as well as up, so you could get back less than you invested.
* Bank of England
** Wesleyan With Profits Growth Fund Series A factsheet (5 January 2024)
*** Wesleyan With Profits Growth Fund Series A factsheet (30 November 2023)
**** Wesleyan’s Investments team have won multiple industry awards, including Responsible Investor of the Year at the Insurance Asset Risk Awards 2022 and Investment Team of the Year in 2023.