High-pressure bond markets; equities widely considered to be fully or near fully-priced; interest rate rises on the horizon; the global economy only at mid-cycle after seven years.
For some this unpredictable state of affairs is simply too tough to call, and they are upping their cash weighting for redeployment when the outlook is clearer.
“There was a bit too much optimism around returns up to the end of April and valuations were looking a bit stretched,” said David Coombs, head of multi-asset at Rathbones. We are going to have a summer of high volatility and elevated valuations, so I want something in reserve.”
While holding cash is not something that Coombs is keen on, he believes the present economic environment leaves investors little choice and currently has cash levels of 12.5% and 4% in his low and high-risk portfolios respectively.
“I hate holding cash and always manage it as low as possible, and historically the high-risk fund has had about 0.1%,” he expanded. “You do not earn anything on cash, so it feels like a waste of capital and expense. But given where we are at this stage of the interest rate cycle, it is appropriate to have some.
“I am not anticipating a crash, but I feel that markets are getting a little bit full and everything is priced based on good outcomes. We are now getting into the silly season – markets tend to have lower liquidity levels which in itself can often create volatility, so I am happy to run with this cash.”
State of play
Justin Onuekwusi, manager of Legal & General Investment Management’s Multi Index range, is currently holding his highest-ever cash levels.
“One of our central views is that once the Fed starts to increase interest rates it will probably do it quicker than the market expects, which will compress the second part of the cycle,” he explained.
“Even if you take a medium-term view, from an asset allocation perspective it is very important to be really dynamic and cognisant of those short-term risks, being able to take risk off the table when necessary.”
Implemented on 15 June, this shift brought cash across Onuekwusi’s portfolios up from 4.35% to 7.15%, with the bulk of the movement occurring in his low-risk mandate.