Europeans’ addiction to cash has cost them billions of euros in potential investment performance over the last five years. But what is the asset management industry doing to encourage greater engagement at a time when governments are looking for ways of transferring the responsibility for financial health in retirement onto the shoulders of their citizens?
Cash is perceived to be the safest asset but, with interest rates at zero or negative, the hope of getting a return on cash is not only difficult but false. With a little inflation, positive real returns are erased. An asset that is guaranteed to lose you money in real terms is not riskless; it is another risky asset class. But, despite this obvious fact, Europeans are still hooked on cash. In the US, the average household has 17% of its assets in cash, while in Europe the equivalent figure is 36%1, 19 percentage points higher. The European situation has hardly moved in the last two to three years – cash levels remain stubbornly high.
The problem is twofold. Asset managers are missing out on a huge pot of cash savings that they could allocate more effectively, performing a vital public service at the same time. Meanwhile, households are saving inefficiently. Through a lack of awareness, apathy or an excessively risk-averse approach, they are reducing their future wealth. In a world where governments will be less able to provide for the old-age population, optimising the potential of savings really matters.
Percentages have little relevance to most real people, so let’s take some examples. A back-of-the-envelope calculation reveals that if Euro area households had the same percentage cash allocations as in the US, each household would have around €23,000 more to invest. This might seem a small amount but with around 150m households in the Euro area 2 the aggregate total comes to over €3trn – a substantial pot of money for the industry if it were all invested in funds. But what would these households gain from this?
We’ve taken a look at the five-year returns on some examples of the largest and most popular funds that a retail investor could have bought with this money.3 If they had invested it all in Carmignac’s popular Patrimoine fund they would have added €4,200 to their savings pot. If they had bought Nordea’s Stable Return they would have done even better, adding an extra €8,600. Other examples include Templeton’s Global Bond fund (€3,600), Vanguard’s European Stock Index fund (€8,200) and M&G’s Optimal Income fund (€6,200). Yes, these funds carry varying degrees of risk but the upside is too significant to be ignored. Lack of knowledge and understanding is restricting the ability of individuals to build greater financial security for their retirement.
There is a strong commercial imperative here to gather more clients (and assets) and the industry needs to find a way to engage these people. More importantly, there is a social need to extend the benefits of long-term savings to the whole population, no matter the amounts they can afford – the industry’s services need to be extended beyond the wealthiest 10%. As stated in the latest report from the CFA Society of the UK, a key part of the value of the investment profession is that it ‘enables access to greater investment opportunities than might otherwise be available.’4
The industry spends a lot of time arguing over fee levels and transparency, active vs passive and smart beta. While these debates should gradually lead to a better retail product offering, there is a risk that in the meantime another generation remains turned off, distrustful of fund investment, and missing out on better savings. Ultimately, any longer-term saving by Europeans with excess cash must be a good thing for individuals and society as a whole, making a real difference to standards of living in retirement.