Some investors may feel aggrieved that their fund managers are charging them for holding large piles of cash, but head of research at FE Rob Gleeson says that sitting on the sidelines is a very useful tool.
“It’s perfectly reasonable for a manager not to plough into the market for the sake of it,” he said.
“If you can’t find the opportunities, then it’s a perfectly valid strategy.”
“It’s far better to be sitting on cash and waiting for better opportunities than being in expensive stocks that have the potential to fall sharply. If you have a methodology that you believe in, then you should stick to it.”
Building up cash levels is particularly common in deep value managers, who only invest in companies they deem to be cheap.
“While it’s a valid strategy, I do think cash is something you should keep an eye on. If a manager is sitting on cash for a very long period, you may have to question the strategy he or she is using,” he added.
It’s quite common for multi-asset managers to hold high levels of cash, with the likes of Marcus Brookes seeing it as a good alternative to bonds.
However, worries over valuations have led a number of equity managers to hold high levels of cash, giving them the opportunity to pounce on cheap valuations when prices fall – as they have been for the last week or so.
For anyone looking to make the most of the current fall in markets – and potential further falls in the future – here are five highly rated equity managers with at least a 10 per cent cash weighting.
John Wood – 19%
The £1.2bn JOHCM UK Opportunities fund has more in cash than any other in the IMA UK All Companies sector, at 19 per cent.
FE Alpha Manager Wood, who has led it to top-quartile performance since he took it over in November 2005, explains that elevated valuations across the board have forced him to build up the weighting.
“When the investment climate is dominated by liquidity [QE], with fundamental investment analysis seemingly of little import, we are somewhat lost,” Wood said in a recent note to investors.
“What we can say is that we have no intention ‘to keep dancing until the music stops’. We will just wait patiently on the sidelines until asset prices fall or, more importantly, cash flows improve.”
“It is pleasing to report that, in returning 22.19 per cent versus 20.66 per cent for the All Share, the fund outperformed its benchmark in 2013. This outperformance was achieved despite our very defensive portfolio positioning. Our focus for most of the year was on preserving clients’ capital,” he added.
JOHCM UK Opps’ strong performance last year in spite of its cash overweight has added to significant outperformance in the first seven years of Wood’s tenure. FE data shows his fund has returned 102.5 per cent over the period, compared with 70.97 per cent from the IMA UK All Companies sector average and 68.26 per cent from the All Share.
Performance of fund, sector and index since Nov 2005
Source: FE Analytics
The fund has outperformed with below average volatility, with its defensive positioning paying off particularly well in the down year of 2008.
Wood and co-manager Ben Leyland see mega caps as the area presenting investors with the best value at the moment. Top-10 positions include BG Group, Shell and BP.
JOHCM UK Opps has ongoing charges of 1.29 per cent, excluding a 15 per cent performance fee.
Alex Grispos – 28%
FE Alpha Manager Alex Grispos’ CF Ruffer Equity & General fund arguably uses cash the most strategically of any mentioned here.
While it sits in the IMA Flexible Investment sector alongside a number of multi-asset portfolios, the Ruffer fund invests almost exclusively in equities and cash. As the markets rise, Grispos sells then builds up his cash exposure, putting it to work when markets fall.
This strategy sees him protect against the downside much more effectively than his All Share benchmark during sell-offs, though he lags behind when markets rise.
Overall, however, FE data shows that the strategy has paid off since he started running it in March 2007; no fund in the IMA Flexible Investment sector has returned more than CF Ruffer Equity & General.
Performance of fund, sector and index since Mar 2007
Source: FE Analytics
Grispos’ cash weighting is currently at 28 per cent, up from 18 per cent this time last year.
Gleeson and his FE Research team rate Ruffer’s strategy highly, including the fund in the FE Select 100.
“Grispos has a simple philosophy. He thinks the best opportunities arise when markets fall and he wants to be in a position to buy stocks cheaply when this happens,” the team said.
“He is not afraid to use rising markets to build up a cash reserve that can be used when the economic environment worsens.”
“This abnormal return profile makes the CF Ruffer Equity & General fund a good candidate for inclusion in a diversified portfolio.”
The five crown-rated fund has ongoing charges of 1.26 per cent, and is just over £200m in size.
Edward Lam – 16.5%
FE Alpha Manager Edward Lam’s wariness of valuations in the emerging markets sector, outlined in a recent interview with FE Trustnet, has seen the manager raise the cash weighting in his Somerset Emerging Markets Dividend portfolio to 16.5 per cent.
This move was well timed given the recent sell-off in emerging markets this year, and has contributed to his slight outperformance.
Performance of fund, sector and index in 2014
Source: FE Analytics
Although emerging markets have had a troubled time of late, Lam believes that consumer-related stocks remain overvalued, preferring to get his exposure to more cyclical areas.
His income-focused fund has been a standout performer in the IMA Global Emerging Markets sector since its launch in March 2010. It has returned more than 13 per cent over the period, compared with a 7 per cent loss from its sector and MSCI EM benchmark. Somerset Emerging Markets Dividend is currently yielding 2.7 per cent. It has ongoing charges of 1.3 per cent.
Angus Tulloch – 13.6%
First State’s Angus Tulloch – one of the highest-rated emerging markets investors on the planet – is known for his cautious style, even admitting to FE Trustnet last year that he believes the golden era for developing economies is over.
The FE Alpha Manager currently has a 13.6 per cent weighting to cash in his Scottish Oriental Smaller Companies IT, which he co-manages with Wee Li Hee and Scott McNab.
This call has been justified by the recent crash in emerging markets, which Tulloch and his colleagues have protected against better than most – in spite of their small cap focus.
Our data shows that the trust’s net asset value (NAV) has fallen to just under 3 per cent this year, compared with 6.27 per cent from the MSCI AC Asia Pacific sector.
The steep widening of the trust’s discount has seen it underperform its benchmark from a share price point of view, though.
Tulloch is best known for running the First State Asia Pacific Leaders fund, which is currently sitting on 4.2 per cent cash. The manager has an established record of beating his peers with significantly less volatility, performing particularly well in the 2008 downturn, for example.
Performance of manager vs peers over 10yrs
Source: FE Analytics
Scottish Oriental Smaller Companies IT has ongoing charges of 1.04 per cent, excluding performance fee. First State Asia Pacific Leaders has charges of 1.55 per cent. Although First State is looking to stem inflows into the £6.2bn fund, it remains open on certain platforms.
Alastair Mundy – 12%
While not an FE Alpha Manager, Alastair Mundy (pictured) is a favourite with private investors and advisers. His deep value style has won him a number of admirers, and led his Temple Bar IT and Investec Special Situations fund to the top of the performance tables over the long-term.
Mundy expressed concern about market valuations in a number of interviews with FE Trustnet last year, stating that his cash weighting had never been higher.
“Valuations are generally high in equity markets, which is odd given we are surrounded by great vulnerabilities and fragilities in the financial system,” he said back in December.
“When valuations are stretched, macroeconomic concerns become harder to ignore. It is a bit of a 'least-ugly competition', with investors reluctant to switch to cash.”
“We believe this encourages the push to unsustainable levels and believe there will be long-term benefits to current inactivity.”
Investec Special Situations and Temple Bar IT still have a hefty cash weighting, at 8.4 and 12 per cent respectively, and his £2.8bn Investec Cautious Managed fund is even more defensively positioned, with a cash weighting of 21.8 per cent.
Mundy has used cash actively throughout his career, which helped him to protect effectively against the downside in 2008 and 2011.
His Temple Bar IT, which is one of the least volatile in the IT UK Growth & Income sector, has also been competitive in market rebounds, helped by the manager’s ability to pick up cheap stocks quickly.
Performance of trust, sector and index over 10yrs
Source: FE Analytics
FE data shows his trust has significantly outperformed its sector over three, five and 10 years. Its high cash weighting has led to slight underperformance over the last 12 months, though.
Temple Bar IT is one of the cheapest UK equity income trusts, with ongoing charges of 0.51 per cent. It is currently yielding 3.07 per cent.
