PA ANALYSIS: Cash is more than just a liquidity buffer

Are investors who hold cash as well as their fund managers unecessarily doubling up on lower risk?


The more recent corrections have caused a further spate of panic selling, with some quant-based allocation processes pushing funds into holding 90% in cash. Figures from Morningstar show average cash levels across funds are currently higher than during the credit crunch in many sectors.

This should not, however, always be taken as an asset allocation call – long/short funds, for example, hold extra cash to cover margin calls on their derivatives.

The argument for cash as a liquidity buffer is credible, but surely allocating to the asset class is the job of the portfolio manager rather than the fund manager?

Among more traditional long-only funds, cash usage has increased although many managers still hold firm to the view they are paid to invest in their specified area rather than asset allocate.

Positive moves

Perhaps the most successful shift into cash in recent years was by Philip Gibbs on Jupiter Financial Opportunities, moving up to 50% liquid during the credit crunch and posting gains while the majority of peers lost money.

He returned to full investment in mid-2009 but the fund has gradually built its cash weighting again under current manager Guy De Blonay, with the level standing at 25%.

William Littlewood has also used cash extensively on his absolute return Artemis Strategic Assets portfolio, although the current level is down at around 8%.

Among multi-managers, Thames River’s Rob Burdett says he is willing to use cash but large positions will typically be in extreme circumstances. In 2008 and early 2009 for example, Burdett and his co-head of multi-manager, Gary Potter, held 30% cash across their funds but the level is rarely above 5% in normal conditions.

Burdett is comfortable with external managers holding cash as long as they have a track record in adding value by doing so, citing Gibbs as a good example.

David Coombs, head of multi-asset at Rathbones, is more cautious on his external managers using cash extensively, with his view dictated by the mandate and why he bought it. He would prefer a long-only emerging market to be fully invested in the region, whereas an absolute return fund manager would be given greater leeway.

There are other managers, such as Dylan Grice of Société Générale, who sees inherent value in cash simply because it has none of the increasing risk currently apparent in equities. He says the holder of cash has an effective option to purchase more volatile assets if and when they become cheap and against projected 0% returns from US equities over the next decade, he sees it as an attractive alternative.

For many individual investors, holding cash in today’s uncertain environment is an anti-risk decision and means they will be well positioned for what Investec’s Alastair Mundy describes as “the inevitable end of the current risk binge”. The negative performance knock-on could be if the fund managers they are invested with are also holding cash.

For the full article, please read September’s issue of Portfolio Adviser published on 30 August


Latest Stories