Coach’s Corner

Many investors have become complacent sitting on the sidelines due to the high yields they've been earning on cash. Complacency is a strong driver of inertia, perhaps the strongest of all.

How can you break through their inertia and inspire prospective clients to step out of cash and play the long game? Consider using a thesis inspired by Parametric's managing director and head of SMA portfolio management Nisha Patel: "Cash will no longer be king."

David: "Nisha, isn't this a belief you've held now for several quarters?"

Nisha: "Yes and we're doubling down on 'cash will no longer be king.' While it may be comfortable to sit in cash right now, there's an opportunity cost in staying there. With the Fed closing the door on further interest rate hikes, history tells us now might be the right time to play the long game."

David: "How so?"

Nisha: "There are two things to review—locking in yields for longer and duration. Given the high-tax-exempt yields out in longer maturities, investors can lock in higher income for an extended period. Compare that to achieving a temporary high yield in cash, which has a high reinvestment risk and isn't locked in beyond that short-term time frame. The risk right now is asymmetric.

We believe adding duration makes sense as, historically, there has been significant upside price appreciation potential when yields fall as the Fed starts to cut rates, to stimulate the economy during a slow period."

David: "Nisha, let's get down to client speak. Our industry has the tendency to use words and phrases that leave clients nodding their heads in agreement yet not necessarily really understanding what's being communicated. Let's go beyond the nod. First, how would you explain asymmetric in client speak?"

Nisha: "You stand to gain more than what you could lose. The degree of upside gain may be worth the risk because of the limited downside probability."

David: "How about duration?" 

Nisha: "Duration is a measure of sensitivity of what a bond will do from a price perspective based on a change of yield. Think of a seesaw. A seesaw is a beam supported by a fulcrum at the midpoint. If one end of the beam is yield and one is price, think of duration as the overall length of the beam. If the beam is long, you will have more force and pressure when one side goes up and down. Longer duration increases the sensitivity between bond prices and interest rates." 

David: "If you were an advisor, how would you get beyond the nod with "cash will no longer be king" when in conversation with existing and prospective clients?

Nisha: "The Fed has clearly articulated hikes are off the table and the next move will be a cut. The amount of yield a client can lock in today creates a cushion. The upside today of adding duration—lengthening the seesaw beam—may be worth the potential downside."

Bottom Line: Harness the power of a well-articulated thesis to help you bust through a client's current inertia by potentially shaking their complacency.