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Jul 19

Alternative equity an alternative to cash???

Oh dear. I just read the above headline in the Money Management daily…click here…and the stated reason is…

they deliver reliable income streams and protect capital in volatile markets

…I don’t think so or more to the point, with no where near the ability of cash. It looks like the S&P analyst is referring to Variable Beta managers as they have rated them highest in the sector and he believes they are unjustly “unpopular”. I’ve written about Variable Beta funds before and believe they could have a place in portfolios but suggesting they are a potential replacement for cash is downright dangerous and negligent.

Cash is a safe haven. Its to be used for a rainy day, a little bit of income, because you think interest rates are going up and because you may need to draw some out today or tomorrow, and because you do not want to take any short term risk. Variable Beta funds may or may not have sharemarket exposure and they may or may not have a lot…plus…you never actually know how much exposure they have at any one point in time…therefore, you may lose money and you may lose a lot…you purely rely on the skill of market timing and pay pretty high fees for the privilege.

I don’t really care how good the manager may be, to suggest alternative equity is a potential replacement for cash because it pays consistent income is wrong and you can never have the same capital protection at low cost like cash.

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1 comment

  1. BB

    I caught that one to, although I interpreted it as a plug for equity income funds (the buy/write funds of Zurich, Macquarie and alike) as opposed to variable beta?

    In this market they have done a reasonable job of delivering income from the option strategies while carrying about 1/2 the beta risk of an average long only asx fund (based on my observations not any in depth analysis 😉 ). In any case, i agree its a big big stretch to suggest they are cash alternatives and I’m hoping the analyst was taken out of context……. hoping.

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