The MM Diversity fund, co-managed by Brookes, holds a hefty 26% in cash, 99.9% of which is sterling and the remaining 0.1% is US dollar. And high cash reserves are a trend across Schroders diversity multi-manager range currently.
Brookes’ preference for cash over bonds is not a new development. He has been bearish on bonds, long-dated bonds in particular, for the last 18 months. But the reason for his continued caution around the asset class stems from his conviction in the interest rate sensitivity narrative and the imminent end to the lower for longer trade.
“In the old days, it was very much why aren’t you buying bonds? Lately, I have just been coming up with new variations of saying ‘I don’t like bonds’,” Brookes joked.
Instead of another year of lower for longer, stagnated growth, Brookes thinks the UK economy is about to enter an ‘inflationary boom’, the likes of which it has not seen since the window between 2003 and 2007.
“For a while we thought employment trends were going in the right direction, which is quite a good indicator of the health of the economy. So, if employers are feeling more confident, it must be because they are seeing decent transactions within their own business, and they feel profitability a couple years out looks good.”
Similarly, the rally in the price of oil from $26 per barrel in February to over $50 p/b will also help contribute to the inflationary environment, he argued.
During periods of inflationary growth, gold, commodities and emerging market equities tend to perform well, while long-term bonds appear less attractive. That’s why Brookes intends to put some of his extra cash to work by adding to his value stocks and EM equities positions.
But he insists the primary reason he is hanging onto such high levels of cash is because of his reticence to buy bonds.
