x Abu Dhabi, UAETuesday 23 January 2018

On the money: 'King cash' must be protected

Cash is boring. Except in times like these. With fear running high across financial markets, cash is king again.

Cash is boring. Except in times like these. With fear running high across financial markets, cash is king again, just as it was after the tech stock crash of 2000, the market blow-up in 1987 and the meltdown of 1929. While moving into cash may not be a wholly sound choice, given that markets have historically trended upwards and rewarded those who stayed in for the long haul, it is certainly a choice that a lot of people are making now.

For one thing, investors have been cashing in mutual fund shares like nobody's business. According to the latest statistics from the Investment Company Institute, an industry association for mutual funds in the US, investors redeemed 12.1 per cent of their stock fund shares in September, continuing a summer-long trend of outflows. Even bond and money market funds - safe havens in normal times - have seen outflows in recent months.

Meanwhile, super-safe investments like US Treasury bonds have spiked since volatility hit in the summer. Yields on US treasury bills, which go down as prices go up, hit a low on Sept 20 of just 0.03 per cent. That means people were buying an investment that promised them returns of nearly zero in exchange for safety. If you, too, are dialling back your risk this autumn, US Treasuries may not be your best bet given their low yields. Still, there are plenty of investments out there, from offshore savings accounts to money market funds, that can protect your savings while giving you respectable returns.

Your safest asset, of course, is cash itself - the cold, hard stuff you store under your mattress. The only problem with cash is that you pay a high price for that safety. It's what accountants call the "opportunity cost" that you pass by when you do not invest. If you could have made a guaranteed return of 3 per cent by, for example, putting the money in a term deposit account, your languishing cash effectively lost you that much. Keeping your money in cash also subjects you to the perils of inflation, which eats into the amount of goods and services you can buy with your money.

Savings accounts and term deposits rank just below cash on the safety spectrum, but they offer a bit of interest to offset those lost opportunity costs. These instruments are held at banks, where your principal risk is the failure of the institution. Which means you're safe. Despite the recent wave of bank implosions, failures are extremely rare. And amid the financial crisis, countries from Ireland to Australia have been guaranteeing deposits, adding a new layer of safety. The UAE recently announced the Government would protect deposits at all national and most foreign banks.That virtually assures the security of your money. There's only one problem: it's hard to find good rates in the UAE. Among the highest-yielding savings accounts in the UAE are the Bank of Sharjah's and Mashreq's, which yield 3 per cent and 2.5 per cent, respectively.

That makes moving savings offshore a measure worth considering. In addition to strong regulations and deposit insurance, offshore accounts often offer hard-to-beat interest rates. Clydesdale Bank International, for example, was recently offering 3.96 per cent yearly interest on a current account. See moneyfacts.co.uk for a listing of the best rates. If you are an expatriate, putting your cash in well-regulated environments like Jersey or the Isle of Man makes even more sense because it exempts you from the UAE's Shariah-inspired inheritance courts, which can take months to process non-Muslims' estates. "Let's say you sold a property today and got US$400,000 (Dh1.5 million) for it and you decided to keep it liquid because you were worried about the markets," said Richard Determeyer, the UAE-based senior regional manager at HSBC's offshore bank department. "We would be advising you to put it offshore."

A third and final option for safe investing: the money market fund. These invest in ultra-short term securities - overnight loans, for example - to generate better-than-cash returns. Though they come with no deposit insurance, they traditionally have posted higher yields than the typical savings account. In September, however, a money market fund Reserve Primary Fund (RPFXX) "broke the buck", dipping below its fixed US$1 net asset value. It had bought Lehman Brothers bonds that lost their value when the company went bankrupt.

Reserve Primary lost money, in other words. That is not supposed to happen in a savings account. Yet the US government stepped in after the Reserve Primary incident to help keep short-term lending markets going, and thanks to such governmental actions the risk of losing your shirt in a money market fund is minuscule. So don't worry and be happy- this crisis will pass, whether you keep your dirhams in a savings account or in a safe at home. afitch@thenational.ae