GAM UK Diversified, Man GLG Undervalued Assets and Henderson Diversified Growth are some of the portfolios headed by FE Alpha Managers and currently hoarding the most cash, according to research by FE Trustnet.
The most basic of asset classes, cash has been outpaced by equities and bonds over the long term thanks to a broadly good run for the latter two and the eroding effects of inflation, but this does not mean it should be avoided at all times.
With inflation very low and markets weak cash has been king in 2016 so far – outpacing 85 per cent of funds in the Investment Association universe. Of course, ‘2016 so far’ is a very short period of time to look at investing.
However, this does highlight the strong role that a tactical cash holding can play in a portfolio: as long as there is not a strong rally, investors can add strategically to positions when markets fall and take advantage of low valuations.
In this article we take a look at the funds headed by FE Alpha Managers that have a substantial weighting to cash relative to their peers and to their own history.
GAM Global Diversified and GAM UK Diversified
First up is FE Alpha Manager Andrew Green, who heads the £553m GAM Global Diversified and the £188m GAM UK Diversified funds. They have a respective 24.47 per cent and 18.96 per cent in cash after the manager built up his weighting in the latter half of 2015.
This is because markets are likely to be weak and cash is best way to protect against likely downside in the short term, Green says.
“It is the belief of the investment team that preservation of capital should take precedence in the decision of whether or not to hold elevated levels of cash, even if that means incurring a potential opportunity cost in the short term,” he said.
“In an environment of inflated US valuations as well as the current stage of the credit cycle, and the potential cyclical peak in the inventory cycle, cash holds a vital role in not only being able to navigate potential turbulence with less impact on capital, but also in actually being able to take advantage of opportunities that present themselves along the way.”
“Moreover, we have not been investing the cash because, while the market is down, the S&P is still only down 10 per cent from all-time highs and we would like to see more value at the stock level before committing any significant funds to the market.”
Green is one of just 30 FE Alpha Manager ‘hall of famers’, which highlights those who have been in the top 10 per cent of managers for risk-adjusted alpha generation, consistence outperformance versus a benchmark and outperformance in both up and down markets in every year since 2009.
Green has managed GAM Global Diversified and GAM UK Diversified since 1984 and 1990, respectively, over which time he has clocked up substantial returns for investors.
Performance of funds and indices over 20yrs
Source: FE Analytics
GAM Global Diversified has a clean ongoing charges figure (OCF) of 1.11 per cent, while GAM UK Diversified charges 1.11 per cent.
Next this £224m fund, co-managed by FE Alpha Manager Bill McQuaker, Christopher Paine and Paul O’Connor, has 22.5 per cent in cash – the highest level for at least three years.
The fund invests in other funds with a mixture of active and passive funds present the top 10 largest positions.
McQuaker is head of multi-asset and deputy head of equities at Henderson Global Investors. The trio have managed the fund since it launched in 2011, over which time it has returned 16.1 per cent.
Performance of funds and index since launch
Source: FE Analytics
O’Connor says the team is still expecting the best returns to come from equities in 2016, despite an ongoing choppy period for emerging markets which was the approximate cause of 2015’s difficult investment environment.
“When we look at the top down and bottom up growth drivers, they very clearly draw us towards Europe and Japan and they still leave us feeling very cautious about emerging markets,” he said.
However he says the fund is holding double-digit cash levels because it thinks heightened volatility means investors from a portfolio construction perspective “have to expect dips”.
“We want to be in a position to buy on the dips rather than sell on the dips so we are starting the year with cash in our portfolio that should give this flexibility,” he said. “We are not in a buy and hold world anymore but a world where we are going to need to work a lot harder and expect volatility.”
Henderson Diversified Growth has a clean OCF of 0.34 per cent.
FE Alpha Manager Henry Dixon, who manages the £449m GLG Undervalued Assets fund, has been hoarding cash since June 2015 and currently has 11.44 per cent of portfolio not invested in the market.
Dixon’s growing cash position in GLG Undervalued Assets apparently stems from concern expressed back in September that the market was headed for a difficult time.
This may well have helped the portfolio to its second year of top-quartile performance in 2015 and since launch in November 2013.
Man GLG Undervalued Assets has returned 14.6 per cent since launch, which as the below graph shows is significantly higher than the return of its IA UK All Companies sector average and the gain of the FTSE All Share over the same period.
Performance of fund, sector and index since launch
Source: FE Analytics
GLG Undervalued Assets has a clean OCF of 0.98 per cent.
Unicorn Outstanding British Companies
Last up is FE Alpha Manager Chris Hutchinson, who has headed this nimble and slightly lesser known UK fund since 2006. It has 13.1 per cent in cash, his highest weighting in at least three years.
The £25.5m fund, which sits in the IA UK All Companies sector, is mainly composed of mid and smaller cap stocks, which broadly have avoided the weakness in markets of late. Unicorn, as a group, is somewhat renowned for its expertise in this part of the market.
Since the manager launched the fund it has returned 155.78 per cent – more than tripling the sector average and almost quadrupling the gain of the FTSE All Share.
Performance of fund, sector and index since launch
Source: FE Analytics
This is the sevenths best out of 206 portfolios with a track record long enough to be included in this period.
Unicorn Outstanding British Companies has a clean OCF of 0.9 per cent.