Cash is not only not trash, it has been one of the better investments in recent months, and to some degree even recent years.

The Barclay’s 1-3 Month US Treasury index (a reasonable proxy for cash) returned 3.05% annually over the past three years (ending June, 2009) with a 0.59% standard deviation. What beat that?

Looking at iShares extensive offerings of ETFs with three or more years of history, we find these funds beat cash (source, iShares):

• SHV (1-12 month Treasuries)
• EWM (Malaysia stocks)
• IEF (7-10 year Treasuries)
• TLT (20+ year Treasuries)
• ILF (Latin America 40 stocks)
• FXI (FTSE/Xhinhua China 25 stocks)
• AGG (US aggregate taxable bonds)
• TIP (US inflation protected Treasuries)
• EWH (Hong Kong stocks)
• EEM (emerging market stocks)
• EWS (Singapore stocks)
• EWZ (Brazil stocks)
• IAU (gold)
• SLV (silver)
• LQD (US investment grade bonds).

Certainly, there are other categories of funds that if they had more time would have outperformed as well.

Looking at Vanguard mutual funds, we see (in categories not covered in the iShares list, and not including single state muni funds), these funds outperforming the 1-3 month Treasuries index over three-years (source, Morningstar):

• VFIIX (GNMA securities)
• VBISX (short-term aggregate US taxable bonds)
• VBILX (intermediate-term aggregate US taxable bonds)
• VBLTX (long-term aggregate US taxable bonds)
• VWSTX (short-term tax exempt bonds)
• VWITX (intermediate-term tax exempt bonds)
• VWLTX (long-term tax exempt bonds)
• VMLTX (limited-term tax exempt bonds)

On the currency front, among ETFs with three or more years of history, these additional funds beat the 1-3 month Treasury index over three years (source, Morningstar):

• FXA (Australian Dollar)
• FXE (Euro)
• FXF (Swiss Franc)

The absence of developed market country funds, other than Hong Kong and Singapore is important, as is the absence of REITs and general commodities.

On a shorter term basis, the Vanguard prime money fund returned 1.48% over 1 year, with a 0.08% standard deviation.  These ETFs (not leveraged, not short and not an ETN), beat that (source, Morningstar):

• (a variety of intermediate and long-term US government bond funds)
• MBB (a government agency mortgage backed bond fund)
• BBH (biotech stocks)
• PCY (emerging market Dollar denominated sovereign debt)
• SZR (South African Rand)
• FXY and JYF (Japanese Yen)
• UUP (US Dollar versus a trade weighted basket of currencies).

This list in no way suggests that bonds and a small number of equity and currency funds will be the only categories outperforming short-term Treasuries or money market funds going forward.  That would be silly.  However, it is meant to show that standing aside from certain asset classes or sub-classes from time-to-time can be the more rewarding course.

Cash (near-cash) is an asset class on its own and should have a role to play in portfolio allocations — growing in weight as conditions deteriorate and shrinking in weight as conditions improve.

Disclosure: we own several of the named funds in managed accounts.

Richard Shaw
QVM Group LLC

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