Risk-reward considerations for determining cash allocation

Though cash allocation levels among the ultra-high-net-worth returned to near-pre-COVID levels, there are still reasons for caution

David Israelson  •  Financial Post
Published Oct 18, 2021  •  Last updated Oct 22, 2021  •  2 minute read
From sitting on cash for peace of mind to deploying it to capitalize on opportunities, how much to hold is a complex set of decisions.
From sitting on cash for peace of mind to deploying it to capitalize on opportunities, how much to hold is a complex set of decisions. GETTY IMAGES

The flight to cash was significant, especially among the ultra-high-net-worth, when markets plunged and uncertainty reigned in early 2020 with the arrival of the COVID-19 pandemic.

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“There was a notable shift into cash last year among our investors. We had never seen anything like it,” says Leon Goren, chair of Toronto TIGER 21, part of a global peer membership network of high-net-worth investors, entrepreneurs and executives.

While the pandemic is still here, markets stabilized quickly and investors redeployed their cash to return to near-pre-COVID levels.

Still, it is not necessarily wise to assume that the global economy is out of the woods yet or that a correction is not in the cards, says John De Goey, portfolio manager at Wellington-Altus Private Wealth in Toronto. And if the recovery is shaky, and with the wild card of inflation, it can still make sense to have a higher cash allocation, he adds.

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Experts say here is what high-net-worth investors should consider when thinking about how much cash to keep.

Risk and Reward — Keeping a large percentage of cash may mean forgoing profits as markets or other holdings go up in a post-pandemic recovery; on the other hand, it minimizes risk. At the end of the day, peace of mind is an important concern. And the ultra wealthy have the long perspective that both values wealth preservation over growth, but also allows for a long horizon to realize gains on assets.

Valuations — Are markets overpriced or will they keep growing for a while yet? Are prospective private acquisitions overvalued as competition for them heats up? Deciding the answer can determine whether you want to buy in or hold on to your cash. In its midyear outlook aimed at family offices, investment firm BlackRock says the real answer to whether markets are a bargain or overvalued is nuanced; there is not a single answer.

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“If you look at the equity market you can identify particular parts that are not overly valued. That is why it’s important to identify different themes and sectors that are attractive within equities. We’re thinking about cyclical securities that we think will participate in a rebound but are not richly valued at this stage,” BlackRock says.

Outside Risk, and opportunity — It’s not all COVID. The climate and other environmental threats pose major challenges for some sectors such as insurance. However, the flip side of this is opportunities in other sectors, such as infrastructure and clean energy and technology. Even with a traditional 13 per cent of assets allocated to cash, a high-net-worth investor worth $100 million has $13 million available for opportunities.

SOURCES: John De Goey of Wellington-Altus Private Wealth, BlackRock Key Investment Themes for Family Offices in 2021, Leon Goren of Toronto TIGER 21

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