Profit important but cash is back, even during times of high inflation

The British investment firm’s current cash weightings have hit historic levels after perceived risks in the global economy moved it to help preserve rather than accumulate capital.

Holding cash and keeping liquid assets in times of high inflation may appear to be a risky decision but it can be a far safer play than maintaining a set portfolio according to investment firm Ruffer.

The British investment firm’s current cash weightings have hit historic levels after perceived risks in the global economy moved it to help preserve rather than accumulate capital.

“Ruffer currently has the highest weighting to cash or cash-like assets in our history,” said Ruffer’s investment director, Duncan MacInnes (pictured), in a recent note. “We are concerned that liquidity is the new leverage and that a degradation of liquidity conditions poses an imminent danger to investor portfolios.”

Asset price inflation has created vast amounts of wealth in the economy, MacInnes believes. It’s also made investors shift their mindset from trying to get rich, to trying to stay rich. However, rising inflation is usually accompanied by an erosion effect on cash.

According to Macinnes, cash may be losing money in real terms but pales in comparison to the losses presented by other so-called inflation hedges like cryptocurrency, gold and property funds.

“Everyone knows that rates are going up and quantitative tightening is sputtering into life, but there is a further, less widely discussed, drain on system-wide liquidity: the entirely rational decision to ditch risk assets and hold cash and cash proxies that are now paying a certain yield in a deeply uncertain world,” MacInnes said.

The main advantage of holding cash, he explained, is having the option to buy distressed assets or being able to seize an attractive opportunity at a lower price. While there are some shortcomings to holding cash, it deserves a lot more recognition than it currently receives.

“2022 has been a year where there has been nowhere to hide, he said. Diversification has failed, cross asset correlations have been high. Balanced, multi-asset portfolios have been badly damaged.

“There are times when it pays to be greedy, and there are time when it pays to know when you have enough.”