Its sheer lack of clout hit home recently when I, having only lived in the country for a few years, opened my first UK-based savings account.
When the employee at the bank told me the interest rate on my everyday savings account would be a meagre 0.6 per cent, I couldn’t help but laugh out loud.
So when you’re literally making less than a penny to every pound you put in the bank and inflation is running at more than 2.5 per cent, is there any point in holding cash at all?
Hargreaves Lansdown’s Richard Troue (pictured) says the low yields on cash are a real problem for investors because they cannot keep as much in the asset class and hope to make a decent return.
"It’s a bit of a dilemma for investors really. Historically you could keep a portion of your savings in cash and earn a half-decent return of 4 or 5 per cent on it, but that’s no longer the case and that does make things difficult for investors."
However, he adds that investors should keep some cash on hand, particularly for emergencies and to take advantage of potential buying opportunities if the market begins to sell off.
"I like to keep some cash to snap-up opportunities when they arise," he continued. "But you can forget any real return on cash."
Troue adds that investors who are cautious on the market may want to keep a higher amount of cash reserves on hand to protect against a downturn, but he says the amount you should hold depends on your own objectives and investment horizon.
"I’d think about 10 per cent as a starting point," he said. "But whether an investor holds more or less than that would depend on how cautious or positive they are at a given point."
He says investors also need to look at the cash weighting of their underlying fund holdings because they may have more in the asset class than they think.
Troue points out Sebastian Lyon has a high cash weighting in his Trojan fund because he is more concerned about the short-term impact of inflation.
"It’s quite a big chunk of the portfolio and investors need to factor that in as well. The more cash held by fund managers, the more cash is in the portfolio overall," he said.
It is worth stressing that cash should only make up a small part of a well-diversified portfolio.
Leaving your money in a standard bank account over the last decade would have made you just 31.59 per cent, nearly 100 percentage points behind something as simple as the FTSE 100.
Only during the very depths of the financial crisis of 2008 would cash have been a better bet.
Performance of cash vs index over 10yrs
Source: FE Analytics
And take a look at the professionals. There are various ways to use cash – either to smooth out volatility by drip-feeding money into the market or to hold back and take advantage of cheap valuations when everything slumps.
FE Alpha Manager Alex Grispos builds up cash in his Ruffer Equity & General fund with a view to ploughing into cheap opportunities when the market falls.
The fund currently has 31 per cent in cash and cash-related assets – the second-highest asset-class weighting in the portfolio.
This strategy has led the fund to strong outperformance since Grispos took charge of the fund.
Over these five years it has made 67.74 per cent, compared with 25.62 per cent from the IMA Flexible Investment sector and 43.97 per cent from the FTSE All Share.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Miton’s Martin Gray (pictured) has been one of the most outspoken bears of recent years, sitting stubbornly out of the rally in the early part of 2013, although he says valuations are starting to look more interesting now that the market has corrected.
However, he is still holding nearly 30 per cent of his Miton Special Situations fund in cash – the highest asset class weighting in the portfolio – because he believes the market still has further to fall.Other funds use cash, not to grab cheap stocks when they think they are set for a rebound, but rather to smooth out volatility and protect against sharp movements from other asset classes, such as equities and bonds.
The massive Standard Life GARS has a whopping 43 per cent in cash equivalents.
Cash is often used by absolute return funds to weather volatility, especially in the current climate where bond yields are so unpredictable.
Standard Life GARS aims to deliver positive returns over a rolling three-year period, a target it has achieved since launch in 2008. However, the giant fund took a hit in the recent market correction, suffering a loss of nearly 3.5 per cent in the last month.
Robin McDonald is adopting the same strategy in Cazenove Multi Manager Diversity.
McDonald and co-manager Marcus Brookes split their £1.1bn fund into three "buckets": equities, cash and bonds, and alternatives. In general, assets are split equally between them.
McDonald previously told FE Trustnet that they currently have 28 per cent in equities and 28 per cent in alternatives, but the vast majority of their third bucket is in cash, rather than bonds.
"Cash currently has a very large weighting in our fund, at 30 per cent," he said. "Six weeks ago we had six bond holdings accounting for 23 per cent, but that is now down to 13 per cent and three holdings."
