As with any investment, your capital is at risk.
I rarely carry cash.
At least not knowingly. I occasionally get the small buzz of discovering a crumpled tenner in a coat pocket, as if I’ve unearthed free money.
For everything else, there is Apple Pay. Double click. Face scan. Transaction complete. Paying with cash now almost feels anachronistic, like writing a cheque or asking someone for directions.
The UK has mostly made the same choice. In 2024, cash accounted for 4.4 billion payments and, for the first time, less than 10 percent of all UK payments. Half of UK adults regularly used mobile payment services such as Apple Pay or Google Pay. Cash has not disappeared, but it has certainly been demoted.
Equity markets have made their own version of that choice. For much of the past two years, they have cared less about free cash flow, balance-sheet optionality – having enough cash or borrowing capacity to act when opportunities or problems arise – and dividends. Instead, the focus has been on spending and building for the future amid the greatest technological shift in generations.
Artificial intelligence may be the most important technological platform shift in decades, and the infrastructure required to deliver it is enormous.
Recent reporting puts hyperscalers’ – large cloud-computing companies, such as Amazon, Microsoft or Google – AI-infrastructure spending at about $755bn this year. For context, this figure is roughly equivalent to the Republic of Ireland’s gross domestic product (GDP). The benefits flow through the companies funding the buildup, supplying the chips, providing the power and laying the digital plumbing.
Meanwhile, among US large-cap companies, cash on corporate balance sheets as a proportion of market capitalisation has fallen to 10 percent, its lowest level since the heady days of 2007.
This flood of investment has helped to drive markets to greater heights. It has also attracted excitement and debate in equal measure. However, changes to the market ecology should give investors pause.
Passive funds now make up more than 50 percent of mutual fund and exchange-traded fund (ETF) assets in the US. As more capital migrates into market-cap-weighted passive vehicles, which are index-tracking funds that put money into the biggest companies because they are worth more on the stock market, investors increasingly inherit the market’s concentration.
The 10 largest S&P 500 companies grew from about 19 percent of index weight at the end of 2015 to nearly 41 percent at the end of 2025.
With much of the top 10 either funding, enabling or monetising the AI buildup, more investor capital is now exposed to the same expectation that today’s extraordinary spending will eventually become tomorrow’s extraordinary cash flow.
That exposure will only increase with an expected wave of mega initial public offerings (IPOs) whose economic promise lies further into the future. This increases what we call ‘equity duration risk’ – effectively meaning that more of an investor’s portfolio depends on cash flows expected many years from now. As a result, returns become more sensitive to changes in interest rates, discount rates (the rate used to convert future cash flows into today’s value, where higher rates reduce that value) and growth expectations.
Now, this might be the right thing for performance for the time being but, as in most things, it’s all fine until it’s not. That’s why, for asset allocators, a cash-generative core should always be king.
Value today, growth tomorrow
The stocks riding high in the performance charts might be pushing value creation further out into the future. However, steady, cash-generative companies, often paying income, are delivering value today.
This makes it a good time to reconsider a portfolio’s balance between today and the future. Because that is the beauty of what cash-generative assets offer: balance.
At one end, high free cash flow and a progressive dividend provide a buffer in difficult times. For companies, this gives them flexibility, while for shareholders, it provides a tangible cash return.
It’s why dividend growers have also tended to combine capital growth with lower volatility and better downside characteristics, as our track record in Durable Growth shows.
At the other, cash funds the future. Cash-rich companies such as Apple and L’Oréal can maintain a buffer, return capital to shareholders and reinvest in their own businesses.
Apple, for example, invests in research and development in custom silicon, while L’Oréal focuses on areas such as AI predictive formulation models. This reinvestment at high rates of return on investment creates tomorrow’s earnings growth.
We call this combination value today, growth tomorrow. Value today comes from cash flows that already exist – dividends, buybacks, resilience and balance-sheet strength. Growth tomorrow comes from reinvesting those cash flows at attractive rates of return.
It’s this combination that makes income growth and durable growth strategies strong candidates to be a core allocation.
A cash-generative core is not an argument against risk. Instead, an income growth or durable growth allocation can provide ballast. It offers value today through income and shareholder returns, growth tomorrow through reinvestment.
It also provides psychological oxygen when the glamorous part of the portfolio starts to attract more question marks than answers.
Ultimately, it is what gives a portfolio the licence to take risk elsewhere, whether in AI, in private markets or in regional value.
Why now?
A cash-generative core is more of a question of ‘why always?’ than ‘why now?’. But the current momentum offers a rare proposition.
Usually, investors are required to pay a chunky premium for value today and growth tomorrow. But after a period of poor relative performance for quality and income-paying equities, they do not have to today.
As the S&P 500’s largest constituents ramp up their future-focused spending without expectation of near-term reward, the index’s free cash flow yield has fallen by 30 percent over the past five years.
Meanwhile, our own free cash flow yield has risen 10 percent and is at its highest level in five years. Effectively, investors can now get more bang for their buck in quality, income growth and durable growth than they have for quite some time.
This opportunity feels timely for allocators considering the balance of their risk budget amid such exuberance.
Clarity with optionality
A cash-generative core is not exactly glamorous. However, markets are increasingly skewed towards distant cash flows, extraordinary capital expenditure and a smaller number of very large companies.
In this context, a cash-generative core offers something increasingly valuable: balance.
Cash represents optionality. It lets companies invest through downturns, buy when others are forced to sell, return capital when reinvestment opportunities are scarce and reinvest to generate tomorrow’s growth.
For investors, it turns a portfolio from a single bet on distant payoffs into a better-balanced collection of value today and future opportunity from growth tomorrow.
This blend of ballast and steady growth might have been left behind recently, but that provides investors with the rare opportunity to strengthen a cash-generative core at a more attractive price.
So, while I am unlikely to start carrying cash any time soon, perhaps the old sign you sometimes see in a takeaway window remains true for portfolios: card payments accepted, cash preferred.
Risk factors
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in June 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Potential for Profit and Loss
All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.
This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this communication are for illustrative purposes only.
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