Top
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.
"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."
Featured Insights
At the Advisor Institute, our goal is not to shape your opinion or provide investment advice, rather to share this viewpoint as an example of what we believe to be a superb display of ism and thesis articulation.
About Risk: There is no assurance that the Strategy will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income.
The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively “the Firm”), and may not be reflected in all the strategies and products that the Firm offers.
Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or the investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.
This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.
This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.
Charts and graphs provided herein are for illustrative purposes only. Past performance is no guarantee of future results. The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.
This image indicates content designed specifically for Financial Advisors / Investment Professionals. This material is not to be used with the public.