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March 11, 2021

The King is Dead – The Case for Cash Alternatives

It is said that cash is king, but the current investment environment has several looming risks for savers who prefer to keep their money in cash and cash substitutes like savings accounts and Guaranteed Investment Certificates (GICs). The combined headwinds of low interest rates, growing money supply and rising inflation potential could leave investors in traditional savings vehicles a day late and a dollar short. While low interest rates are not a new phenomenon, the added pressures of rising prices and money printing present a strong case for cash investors to consider “moving up the risk spectrum,” either by extending their time horizon or investing in solutions with some daily price volatility. For those willing and able to accept more risk, CI Global Asset Management (CI GAM) has an innovative suite of conservative income products that provide savers with the chance to generate real returns while preserving capital.

Lower for longer: cash alternative investment benefits

Ever since central banks dropped rates to near zero in response to the Great Financial Crisis of 2008-09, investors have had to settle for paltry yields on their short-term, high-quality fixed-income investments. After almost a decade of low policy rates and a fumbled attempt at interest rate normalization in 2018, central banks have cut rates back to zero in response to the global pandemic (Figure 1). Traditional short-term savings vehicles, like savings accounts and GICs, are priced based on short-term policy rates. Canadian and U.S. central banks have expressed their intention to hold rates steady until 2023, dampening the prospects for more attractive short-term yields any time soon.

Source: Bloomberg Finance L.P. As of January 31, 2021


Stimulus spurs currency debasement

Currency debasement is when the intrinsic value of a currency is lowered. In response to the rapid spread of COVID-19, governments around the world implemented sweeping lockdowns.  When it became clear that the economy would have to be put on life support while scientists worked on a medical solution, policymakers delivered record fiscal and monetary stimulus to bridge the economic chasm. In most major economies, this stimulus has been partially funded by the creation of new money. In Canada, for example, broad money supply has grown by about 20% over the past year (see Figure 2). In theory, when new money is created without a commensurate increase in productivity, the value of each unit of currency depreciates. This is an inflationary scenario; there are more units of currency in circulation chasing fewer real goods and services, which puts upward pressure on prices. As a result, monies held in securities earnings less than the inflation rate lose purchasing power.

Source: Bloomberg Finance L.P. As of January 31, 2021. M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money.


The real risk – Impact of inflation on the purchasing power of cash

A key risk that many investors are not positioned for is the risk of inflation eating into the purchasing power of savings. The “real return” on an investment is calculated by taking the gross return and subtracting inflation. In eleven of the last twelve years, GICs have delivered negative real returns for investors (Figure 3). The expectations for inflation are rising, due not only to new money creation, but also because market participants are betting that economic re-opening will unleash pent up demand from the consumer sector. The starting yield on a 5-Year GIC is currently 0.8% compared to 5-year inflation expectations of 1.7% (based on the Canadian breakeven rates), setting investors up for further purchasing power deterioration.

Source: Bloomberg Finance L.P., Morningstar Research Inc. As of December 31, 2020.


Move up, get more

Cash still has a place in investors’ portfolios.  For investors with ultra-short time horizons or no tolerance for any market volatility, cash and cash substitutes are the right choice. Additionally, cash can be a valuable component of a portfolio’s overall asset allocation.  However, the relative safety of savings and GICs come with an opportunity cost, and investors primarily using traditional savings risk falling short of their objectives or losing purchasing power. To increase the certainty of meeting your wealth and retirement goals, consider moving up the risk spectrum with CI GAM’s actively managed short-term income solutions. For clients willing and able to take a small step up the risk spectrum, like short-term bond, multi-asset and multi-sector fixed-income funds can provide:

  • Higher yield
  • Higher return potential
  • Protection against inflation
  • Protection against interest-rate risk
  • Active risk management.

For more information, contact your financial advisor or CI GAM sales representative.

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About the Author

Michael Locke

Michael Locke, CFA, CAIA

Blog Author



This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. 


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Published February 26, 2021.