Cash is not always king for fund managers, particularly when the markets are rising fast as they have been for most of the past five years. A number of managers have fallen quickly fall down the performance tables in recent years because of high cash weightings.
However, when markets have taken a tumble or seen outright crashes those with the opportunity to swoop in and scoop up bargains have been able to dine out on the outperformance for years to come.
Of the 363 funds in the IA UK Equity Income and IA UK All Companies sectors some notable managers have been upping their cash levels beyond their normal monthly fluctuations of late, presumably in anticipation of greater market volatility or something more severe.
Since the beginning of the year the likes of Tineke Frikkee, manager of the £43m Smith & Williamson UK Equity Income fund, and FE Alpha manager Henry Dixon, who manages the £300m GLG Undervalued Assets fund, have been hoarding cash.
They have hiked cash from 4.8 per cent to 12.6 per cent in the case of Frikkee and 5.5 per cent to 11.5 per cent when it comes to Dixon.
JPM UK Focus and MFM Bowland – both in the IA UK All Companies sector – have been other notable funds to do the same. The former two funds have hiked cash to around 20 per cent from almost zero several months ago.
Cash can be used as a strategic allocation in expectation that the market will fall or is currently expensive, a view particularly pertinent at the moment when there are more stocks hitting 10-year highs than there are looking cheap, Frikkee says.
“I have been upping cash in anticipation of a correction. I’m hesitant to say how big that correction will be. We did have a little wobble In March but not significantly, but at the moment the number of interesting buying opportunities just isn’t very high,” she said.
According to FE Analytics, the FTSE 100 has gained almost 9 per cent over the year so far.
Performance of index in 2015
Source: FE Analytics
The manager says that while she has been strategic with cash weightings in previous periods since she took over the fund, this is one of the most extreme.
“I believe since the summer of 2014 the investment backdrop has become more volatile and we seem to be in a market where you move one step forward and one step back, a see-saw kind of market, it is doesn’t seem to be a period of prolonged up months.”
“We have had a quite strong start to the year, very strong in just a few months. This makes me nervous on valuations. I am biding my time and setting notional entry prices.”
Frikkee has the second highest weighting to cash with the IA UK Equity Income sector with only one other fund with cash in the double digits – the £38m ConBrio UK Opportunities fund.
It has a whopping 40 per cent in cash. While this has been built up from nothing in January, the fund spent half of the last year with as much.
The IA UK Equity Income sector has a high percentage of funds mostly fully invested, with only a further five funds with cash higher than 5 per cent of the total assets – a normal amount to deal efficiently with inflows and outflows.
Dixon’s growing cash position in GLG Undervalued Assets apparently stems from concern that despite a healthy return in the first quarter of the year, material risks remain lurking in background – most of all liquidity.
“This can inhibit the true price discovery of certain assets and lead to extreme volatility, particularly in certain small-cap equities and some areas of the high yield credit market,” the manager told FE Trustnet back in June.
“Whilst action from the Bank of Japan and the European Central Bank could well mean there is more central bank liquidity in markets next year than this, it is our view that this defers the problem of inflated asset prices rather than solves it.”
Dixon said at the time that he was paying more attention to liquidity as defined by daily trading volumes, while assigning “extreme importance” to the health of companies’ balance sheets, with an emphasis on net cash.
Despite Dixon’s large and growing amount cash balance, it does not seem to have hurt performance and the fund has managed to stay ahead of the FTSE 100 and the sector average.
Performance of fund, sector and index in 2015
Source: FE Analytics
Bearishness is also apparent among discretionary fund management groups.
Oliver Wallin of Octopus Investments recently said: We’ll be approaching the coming months cautiously, and our view that most of 2015’s gains would be captured in the first quarter remains unchanged. The odds are increasing for some form of pull-back and in anticipation of that we have looked to take some profits from our equity investments, placing the proceeds in cash with a view to buying on the stock market dips.”