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Why top managers are dashing for cash
by James Phillipps on Jul 24, 2013 at 14:13
Despite the meagre yield on offer, a growing number of top investors are building up cash weightings as a buffer against whipsawing markets. Here, five fund managers explain what's driving this move.
Despite the meagre yield on offer, a growing number of top managers are building up their cash weightings as a buffer against whipsawing markets.
The move is certainly not confined to equity fund managers. Asset classes across the board have suffered extreme volatility in the wake of US Federal Reserve chairman Ben Bernanke’s comments about tapering quantitative easing.
Whether through profit taking or sitting on the sidelines waiting for a more opportune time to deploy capital, more and more managers would rather face the risk of cash acting as a performance drag than be fully invested.
We look at why for these managers cash is king.
Ben Leyland, JOHCM Global Opportunities: 14.7% cash
‘Our cash balance rose materially this month. In short, cash is what keeps us honest in applying our absolute valuation control. We feel no pressure to be fully invested, and we do not manage either the cash balance or turnover.
‘Equity investors who force themselves to be fully invested at all times end up impairing either their buy or their sell discipline. Again, this is what got so many investors in trouble in the early 1970s and late 1990s. It is particularly dangerous now, because it is accompanied by an overemphasis on yield rather than total return.
‘When we have more sells than buys, the cash balance goes up, as does turnover. This does not mean we have no ideas, but it does mean we cannot find enough stocks at the right price to offer a favourable risk/reward balance.’
David Jane, Darwin Multi Asset fund: 20.3%
‘A material exposure to Japanese equities has been a significant contributor to our top decile performance year to date but over recent weeks we’ve been taking profits here, in order to reduce exposure on concerns over its contribution to portfolio volatility.
‘The combination of these sales and fund inflows has seen our cashflow move to around 20%, the highest in the fund’s history. The spotlight has been on increased equity market volatility but we are seeing declines across all asset classes as markets digest the implications of the potential for a significant change in the investment environment.’
Sebastian Lyon, Trojan, 9%
‘It is an interesting coincidence that we faced the same bewilderment in 2007, when our liquidity was similar to current levels. We do not forget that we aim to preserve capital, rather than maximise upside, which leads to disproportional downside risk.
‘We admit we are not clever enough to know when the music stops but we are secure in the knowledge that we have long left the party before the clock with no hands strikes midnight.
‘We share the sentiments of successful veteran fund manager, Jean-Marie Eveillard of First Eagle Funds, who said, “I would rather lose half of my shareholders than half of my shareholders’ money.”’
Michael Pinggera, Four Multi-Strategy: 65%
Pinggera’s Multi-Strategy fund, which seeks to achieve an absolute return through a core-satellite approach with a particular focus on momentum, is high in cash. Its core portfolio has a zero weighting to equities and a 65% cash pile, with Pinggera finding few investment opportunities while markets lack momentum. He says this is because they are in a transition stage as they grapple with what the withdrawal of quantitative easing will actually mean.
The manager notes: ‘Our main focus has got to be what the mandate says, and what it says is “Don’t be a hero”, so we have taken risk off the table. I think there is going to be volatility since we have got to get over some real hurdles, so why do I need to be a hero?’
He said the biggest risk is that markets rally substantially while he is sat in cash, so he has sought to counter this by purchasing call options on the FTSE at the beginning of the month to potentially gain some upside exposure.
Nick Kirrage, Schroder Income: 4.6%
‘We would rather sell positions and let cash go up that has been a drag on the portfolio for the last six months, but [over] the long term this works for us.’