Sensible allocations
For, Jon Horsfield, associate director of investments at Cornelian Asset Managers the current environment has been and remains very challenging.
As a result, Horsfield said the firm has about 3% in cash, but is underweight risk generally, and has a position in some liquid alternative strategies. It has also recently increased its exposure to TIPs as a result of its view that there are upside risks to inflation.
“Increased cash holdings are partly a symptom of the fact the alternatives to cash are increasingly unattractive,” he said. But, he added, one has to be sensible about such allocations, “A 20% holding in cash over the long term would definitely not wash with clients.”
European Wealth is of a similar mind in its justification for its recent decision. Pointing out that it views the move to higher cash weightings as a short term one, it said the decisino gives it two things: “First, it gives us the peace of mind that we are protecting our clients’ wealth against the possibility of a short, sharp pullback. Secondly, it gives us the opportunity to put that money back into the market at lower levels if such a pullback materialises.”
This of course is the key when it comes to holding cash and one in which garnering the trust of clients becomes paramount.
As Stubbs points out, when historical returns are calculated, cash always looks terrible, but he adds “those returns do not include the optionality and opportunity value that a higher cash balance confers onto investors.”
In the current environment, there remains a great deal of uncertainty and, arguably a lot of complacency. Such an environment demands more flexibility than has historically been needed, especially as one doesn’t have the luxury of a high overall yield on which to fall back.
All of which arguers well for those who have ammunition left when volatility does again rear its head. The risk of course is that one doesn’t take the shot when it does present itself, but that risk is lessened if one’s clients fully understand what you are aiming at and, importantly, how dangerous the opponent is.
