Cuts. Cuts. Cuts. Despite being a glass half full person, I must admit to being aware of much negativity in the air. Demands on charities’ time and resources are only increasing, and this onslaught of need is apparently to be addressed within a reduced funding envelope. Inspiringly, we witness time and again that these organisations are determined to rise to the challenge and meet that demand – often delving into those reserves which have been accumulated in slightly better times.
They say a week is a long time in politics, but within investment markets it isn’t a very long period at all. In our spring 2022 edition of Charity Perspective, my colleague David Hourston raised the issue of soaring inflation and doing more with cash reserves. For those fortunate enough to have investable reserves and with little return on cash at the time, the inevitable short-term volatility within markets has been uncomfortable. Not helped by some political turmoil during autumn 2022, interest rate expectations in the UK continue to move upwards as inflation levels remain ‘stickier’ than first envisaged. Rapid interest rate rises have been a double-edged sword – as a tool to help curb inflation it is pretty blunt and, in the process, thumps those with higher levels of debt or low-income households. This is therefore serving to increase that demand on charitable organisations.
‘Cash is king’ reincarnated
Being an optimistic person, I look for the positives. Higher interest rates bring opportunity – the mantra ‘cash is king’ is back, finally. Cash is a viable alternative asset class for the first time since before the global financial crisis. Charities, by their nature, tend to be relatively risk averse and can require higher cash levels for liquidity. Is now the time to consider putting that cash to work a little harder?
“When people talk about cash being king, it’s not king if it just sits there and never does anything.”
Warren Buffet1, October 2008
Warren Buffet (the Oracle of Omaha) makes a valid point. Cash needs to be used to be effective – whether by investing in real assets or gaining interest. At the time of his observation, the great financial crisis was in full swing, leading to a huge disinflationary period (UK CPI fell from 5% to under 2%). In the current climate, with inflation recently hitting over 10%, cash doesn’t buy a fair amount more. But until such times as it does, earning more for holding that cash at least eases the pain.
During times of uncertainty, short-term peace of mind can often be prioritised over longer-term strategic goals, leading to too much liquidity – the ‘just in case’ mindset. The investment industry doesn’t believe the financial system is replaying the 2008 crisis. However, nervousness over potential institutional banking failures has not been helped by the Silicon Valley Bank crisis and the negative publicity caused by its lower credit rating and concentrated risk profile.
Credit rating risk
To mitigate some of the potential institutional risk, at RBC Brewin Dolphin we are proud to be part of a banking institution which is robust and currently offers a better credit rating (AA-)2 than all UK registered banks and even the UK government. Royal Bank of Canada (RBC) also provides a cash solution with comparable market rates for qualifying charitable organisations.
A viable alternative
The gradual erosion of the ‘real’ value or buying power of that liquidity due to inflation is often unseen. Then, when organisations wish to make that strategic purchase, the cash just doesn’t seem to go as far as once was planned. Peace of mind is aided by genuine diversification, and cash can again be considered in the overall investment of an organisation’s assets. If a good credit rating combined with the rates now available is utilised, the comfort of cash can be maintained while once again achieving some form of protection against inflation expectations.
This allows organisations to look beyond the short term to the next stage of the cycle, to grow assets to protect against longer-term inflation, and achieve their objectives. It is a fine balancing act but one where cash as an asset class is now part of the conversation. It is one that boards and trustees of charities, having conducted their due diligence, should take advantage of as part of their overall strategic financial plan.
1 Interview with Charlie Rose, www.cnbc.com. 1 October 2008
2 *S&P as at 28 February 2023
The value of investments, and any income from them, can fall and you may get back less than you invested. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Opinions expressed in this publication are not necessarily the views held throughout RBC Brewin Dolphin Ltd.