Editor's letter

There is a degree of certainty and safety being in cash, which was heralded as the king of investments last year as seismic shockwaves buried investor sentiment. By the end of 2008, this switch into cash had reached huge proportions, to the extent that the accepted wisdom of a having portfolio split 40:40:20 respectively between equities, bonds and cash has become a recommendation to put 70% into cash and meddle with the remainder.

As well as starving the capital markets of the liquidity that makes them work, this style of doing business is of little use to frightened investors. The returns from deposit accounts went through a purple patch in the earlier part of last year that saw some banks in Europe promote 4-5% returns on these humble investments.

A reduction in the interest on deposit accounts later in the year to a more modest 2-3% means that investors might almost as well be in cash. In fact, many returns are even lower than this headline figure, and each central bank rate cut ensures that this could remain the case for the months, and the year, to come.

Merrill Lynch's final quarterly investment report of 2008 contained some sobering figures. According to the US bank, at the end of last year a typical US money market fund yielded just 0.73% a year. The consequence is shocking over the medium to long term - this extraordinarily low level of return translates into an investor taking a mere 95 years to double his money.

Credit quality remains at the top of the list of investors' concerns, and won't have been helped by credit-rating downgrades in December that saw almost all banks worldwide reduced to a single A rating. But understandable as it may be, the current direction is unsustainable. Investors need returns and will not be content to watch their money sit and fester. With many of them in cash, with deposit levels low, and with other investments rapidly losing what charm they once had, there is a need for a guaranteed return of capital that offers upside when the market turns.

The obvious conditions for a swift renaissance in structured products are therefore already in place, namely hungry and avaricious investors.

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