Investment Ideas—Is Cash at a Tipping Point?

Stephen Dover, Head of Franklin Templeton Institute, recently hosted a discussion with Michael Buchanan, Co-Chief Investment Officer, Western Asset Management, and Brendan Circle, Portfolio Manager, Franklin Income Investors. The group considered the current market environment as it pertains to cash in client portfolios. Has cash reached a tipping point?

One of the most common questions advisors have asked us recently is what to do about cash in their clients’ portfolios. For our latest “Investment Ideas” panel discussion, I asked two of our portfolio managers, Michael Buchanan of Western Asset Management, and Brendan Circle of Franklin Income Investors, if now is the time for investors to move away from cash. The following are some highlights from the discussion:

Cash yields are attractive today. In the United States, money market funds hold roughly US$6 trillion in assets.1 The popularity of cash makes sense as the average money market return for 2023 was 5.2%, versus a long-term historical average of 3.3% and near zero for the past decade.2

Yields and valuations move quickly. Recent periods—like the end of 2023—remind us that as interest rate expectations change, opportunities for appreciation are missed without exposure to broader segments of the fixed income and equity markets.

There is reinvestment risk from holding cash. Investing at the front end of the yield curve provides decent yield today, but when those bills mature and it is time to redeploy capital, that same yield opportunity may not be there.

Markets are starting to look past the current economic environment. With the expectation of a soft landing and as the Federal Reserve potentially shifts monetary policy away from tightening, lower interest rates typically lead to strong returns within fixed income.