Stock markets continue their advance but many headwinds remain to make the outlook for further progress more uncertain. This has led some professional investors to hike cash but does this mean cash is also a good option for those planning to top up their ISAs?
Performance of index over 5yrs
Source: FE Analytics
Investors no longer have to choose between putting in their cash ISA or their stocks & shares ISA, as the New ISA system effectively merged both products into one. This means investors could put the full £15,000 in cash rather than leave themselves exposed to a market correction.
FE Trustnet has noted over recent weeks that fund managers such as Miton’s David Jane have been selling down bond exposure and raising cash levels. Other high profile names with high cash levels include Schroders’ Marcus Brookes and JPM’s Bill Eigen.
Jane said: “While it is difficult to call the top of any market, and we don’t generally attempt to do so, we are concerned that such extreme valuations could be quite a destabilising factor.”
Some have pointed to lower UK inflation as a reason why cash could be a little more attractive than it once was, but intermediaries say investors should still consider putting their money to work.
UK inflation rates dropped to a record 0.3 per cent last month, according to the Office for National Statistics. The data shows that this was caused by plummeting oil prices and cheaper groceries amid a supermarket price war.
Ben Willis (pictured), head of research at Whitechurch Securities, can see why cash might not be as unappealing as it once was. 
“We are still in the low interest rate environment and so deposit rates also remain low, a scenario we do not see changing in the short term,” he said. “However, with inflation falling to a record low, savers can get real returns from cash at present.”
As long as interest rates are higher than inflation, the spending power of money is preserved. However, it’s well-known that higher risks make for higher returns and sitting on a nice safe nest-egg is not exactly going to pay off your mortgage.
Darius McDermott, managing director of Chelsea Financial Services, said: “Cash savings of up to the £85,000 are protected by the Government, so it’s low risk. You can’t lose money. But, the returns are low.”
“Inflation is extraordinarily low at the moment, but you’re [still] looking at a very, very moderate return or potentially even a negative return. Cash works for the low risk side of the deal, but it doesn’t give good returns.”
JPM Multi-Asset Income manager Talib Sheikh highlights just how disappointing the returns on cash have become since before the financial crisis.
“If you had invested £100,000 in a one-year bank deposit back in 2007, you would have generated an income of nearly £6,000. Compare that to today and the same investment would only generate just over £1,000,” he said.
“In other words, traditional ‘risk free’ sources of income that might once have sustained conservative investors are just no longer adequate.”
But some investors do see the appeal of cash at the moment – especially as other low-risk investments such as bonds look so unattractive. 
Anthony Rayner, co-manager of Miton’s multi-asset fund range, says that government bonds no longer play a crucial role for them as they have recently been almost as volatile as the stock market.
He said: “When we consider our portfolios, one of the most important factors we have to understand is how, and to what degree, we should diversify our equity exposure.”
“However, whilst the correlation between bonds and equities remains negative, bonds have recently been much more volatile than usual.”
“As ever, our focus is on capital preservation and, as fixed income appears fairly stretched and looks less likely to be able to fulfil its role as equity diversifier, we are happier to hold more cash than normal.”
Meera Hearnden, senior investment manager at Parmenion, says the return offered by cash is still “paltry”, but the decision to hold it should be based on how and why the investor intends to use it.
“Funds that hold large cash positions for specific reasons over the short/medium term due to frothy valuations, or in anticipation of excessive volatility are perfectly good reasons if it means it may shelter some capital and minimise losses,” she said.
Despite the low yield, the preservation of capital is a tempting prospect for many investors. What’s more, if an unexpected expense were to come up, the liquidity of holding cash allows the investor to meet his financial obligations.
Again, a more appealing prospect than having to sell stocks during a bear market. Nevertheless, it is rare that you will meet an investor who believes that holding on to cash is a good long-term solution but those very worried about the immediate outlook should consider it.
Adrian Lowcock (pictured), head of investing at Axa Wealth, said: “Cash offers some protection for investors as inflation is falling fast and likely to turn negative. Investors are now getting a real return on cash.”
“It should be used in the short term for defensive investments whilst waiting to find alternative opportunities.”