Be wary of hidden cost of investing in cash, warns BJM PCS

This contrarian alert is currently being circulated to some of South Africa’s wealthiest families by investment strategists at BJM Private Client Services, a specialist adviser to high net worth individuals and trusts.

The Rosebank-based asset manager is distributing the ‘cash cautionary’ at a time when some JSE counters have shed significant value and the low-risk yield on cash is about 11.5% a year.

Yet BJM PCS insists that cash investment at this moment carries a disguised lost opportunity cost that few portfolios can handle.

Tony Barrett, head of wealth management at BJM PCS, acknowledges that the investor circular contradicts the stance of those advisers who urge clients to build a cash stash and flies in the face of bearish JSE sentiment.

Barrett adds: “A cash-heavy portfolio seems like a sensible and mature option, but the lost opportunity cost of such a strategy should not be ignored.

“You will not lose money by sitting in cash, but you will not benefit from any growth or bounce that may befall equity markets. A number of JSE stocks have literally been decimated since the top of the market in October 2007. These are still by and large solid companies with good business operations and good future potential.

“Equity markets are known to overshoot on the top side at the peak of a market cycle, but they also oversell on the downside when sentiment is at its worst.”

BJM PCS says the way to exploit the overshoot at the bottom is to seek well-researched equity opportunities rather than move to the sidelines.

“We do not know the exact bottom of the market,” says Barrett, “but we do know that equity markets always bounce back to new highs in the fullness of time and over the complete investment cycle.

“Often the best time to invest is when it feels like the wrong thing to do.”

Despite current volatility, BJM PCS decided this was the time to reaffirm its belief that wealth-building is best facilitated by taking the emotion – out of the investment process while maintaining a consistent flow of quantitative and qualitative information.

Barrett recalls: “Investors had to endure the dotcom bubble during 2000 and then faced horror stories of corporate malfeasance and corruption in 2001. In South Africa the situation was exacerbated by the currency falling out of bed. Few people would have bet that 2003 would have seen the beginning of one of the strongest bull markets experienced by the JSE in recent times, yet that is precisely what happened.

“The opportunity cost of being out of the equity market and staying in cash over this period was significant, even though cash felt like the right place to be.

“We would advise clients not to react to feelings and emotion, but to stay aligned to their investment strategy.”

The wealth manager does not advocate a headlong rush back into the market. However, Barrett points out: “We do believe that value is starting to emerge in certain sectors and within certain shares, and that a measured and tactical buying approach in line with overall investment goals and objectives should be implemented.

“Staying out of the market and missing the recovery and inevitable growth in equities constitutes a cost that few portfolios can handle.”