Anthony McDonald, Head of Portfolio Management at Aegon UK, looks at how the safety of cash investments could be distracting clients from assets classes that offer more positive outcomes in the long term. He also reflects on Aegon’s latest research to highlight the asset classes that financial advisers feel will give their clients the best returns for 2024.
As we made the leap into the new tax year, I’m sure many of us in the world of financial management have been using a good chunk of our time to sit back and take stock of where our key investments stand.
From returns targets to risk profiling, there is always a lot to consider when reviewing how asset classes have performed relative to our expectations. But, in this seemingly never-ending period of market volatility and economic uncertainty, I’m sure this process has been even more involved for those of you operating in the field of financial advice, as you sit down to discuss options with clients who often want concrete answers in the face of unpredictable circumstances.
Like us, you may have found cash a more active discussion point in recent years, as interest rates have finally risen from the rock-bottom levels at which they were previously marooned. After all, cash has been viewed by many – including us at Aegon – as a safe port of call in these challenging times, offering greater risk protection and higher rates than we have come to expect since the 2008 financial crisis, even if high inflation has hit real returns.
However, we’ve become less positive on cash despite those higher rates – in fact, we worry it may be becoming a distraction from possibly better growth alternatives. More importantly, our latest Adviser Attitudes1 research indicates that many financial advisers feel the same, as they ranked cash as the second-worst asset class for returns in 2024.
Our changing view on cash
We held a positive view on cash throughout 2022, the period most would probably consider to be the peak of the ongoing cost-of-living crisis. We consequently held overweight positions on cash in the multi-asset funds that we run, as we sought to mitigate the risks that we felt were posed by high valuations in bond and equity markets and made them particularly exposed to economic shocks.
However, even though interest on cash had risen to higher levels, we switched to a negative outlook on the asset class during 2023.
Backing our philosophy of long-term, value-based investments, we felt the headlines surrounding cash were obscuring the positive re-pricing being displayed by other less visible assets. For example – in 2023, UK gilt yields also reached their highest level since the global financial crisis of 2008.
While there is no doubt that cash offers advantages in low volatility and risk of loss, it might not best serve longer-term investors in their efforts to meet long-term financial objectives. We don’t think this is a time to make the decision to forego investment returns that work towards long-term goals, in favour of short-term safety – especially as we’re likely to see interest rates fall soon.
What do advisers consider the best asset classes for returns in 2024?
I’ve already mentioned that our latest Adviser Attitudes survey showed 36% of financial advisers who responded to the survey feel cash is likely to be the worst asset class for returns this year, second only to commercial property (60%). But what did they rank as the best?
In first place, 49% of advisers selected US Equities as the asset class best poised to deliver the most significant returns for their clients in 2024. This was closely followed by UK Equities in second (44%), and Emerging Market Equities in third (41%).
You’re probably wondering why that is, and I believe there are a few reasons.
Firstly, due to being at the centre of the AI revolution, US Equities have outperformed expectations for each of the past five years. Many advisers are clearly banking on that to continue, although I’m not so sure it’s sustainable.
Secondly, it seems advisers may share my view that the difficult economic and market outlook many are predicting for the UK, is overly pessimistic. Even a modest recovery from the current period of stagnant growth could boost a market that seems to reflect low investor expectations – particularly smaller companies that are often more exposed to the domestic economy and where valuations appear increasingly compelling.
Thirdly, 2024 is set to be a pivotal year for politics – including elections within the US, UK and many emerging countries. In fact, over 40% of the world’s population could have the opportunity to vote for a new political leader this year. Advisers are clearly optimistic that there will be positive change if new powers take charge. We’ll have to wait and see on that one.
What’s next?
In the wake of ongoing market volatility, and with 2024 set to be a year of political change, it’s no surprise that advisers hold varying opinions on the best investment approach.
One thing for certain, though, is that in uncertain times like these, expert input from yourselves will remain key to achieving diversification and positive long-term investment outcomes within your client portfolios.
About Anthony McDonald
Anthony is Head of Portfolio Management at Aegon UK. With 16 years’ experience across the investments industry, Anthony is responsible for a number of Aegon’s key funds, including its multi-asset and risk-managed portfolio ranges, with a collective £15 billion in assets under management.
