Coombs (pictured), who is head of multi asset investments at Rathbones, has 19 per cent cash in the Rathbone Multi Asset Total Return fund and 9 per cent in his Rathbone Multi Asset Strategic Growth Portfolio.The manager, who is head of multi asset investment at Rathbones, says that he is protecting himself from a market correction he expects to arrive this year.
“There is a high probability of a market correction in 2014, that’s why we’re holding 19 per cent in cash at the moment in this fund. It was 21 per cent last week but we had to take it down a little so as not to breach our limits,” he said.
“We think a market correction could appear in both credit and equity markets.”
Coombs thinks that a possible market correction could be driven by earnings disappointments or a quicker end to QE than the market anticipates, in the UK particularly.
“The US market is already there in anticipating an end to stimulus; it’s the UK that’s vulnerable,” he explained.
“The advantage is that it shouldn’t go down and in the event of a sell-off in both equities and credit, I’ll be able to invest in both of them.”
“I want to be the person who’s able to take advantage of volatility and I’m actually wishing for volatility at the moment.”
“When I see equity markets fair-valued and bond markets overvalued, it just tells me: I should be holding cash.”
Performance of fund vs benchmark over 3yrs
Source: FE Analytics
According to data from FE Analytics, the Rathbone Multi Asset Total Return fund has made 13.32 per cent over the past three years, compared with 9.09 per cent for its LIBOR 6month plus 2 per cent benchmark.
“Generally my outlook for UK equities is pretty mundane,” Coombs continued, “that’s the top of our expectations. Our range is between 2 and 9 per cent, which would mean a negative capital return at the bottom end of that.”
“You’re probably looking at about a 6 per cent dividend, with a total return of 8 to 9 per cent, but that would be a very good result.”
Several fund managers have recently voiced concerns that a correction in global equity markets is just around the corner, due to excessive valuations and increasingly bullish investor sentiment.
Premier’s Simon Evan-Cook recently warned investors against using funds with a high cash weighting as a protection against a sell-off, arguing that they are just as likely to miss out on potential returns as they are to correctly time the market.
Evan-Cook says he seeks to avoid fund managers who are accumulating high levels of cash in anticipation of a market correction.
“Generally speaking, as a starting point, we like to have fund managers that stay fully invested and leave the rest up to us. However, it depends on how they are doing it," Evan-Cook said.
"What we don't like people doing is having a big cash position based on a macro call and we don’t like someone saying, 'oh we are a bit scared about this so I am going to have 20 per cent in cash'. We just don’t like that and we avoid the managers who do it.”
“We can do that ourselves, and you are just as likely to get that wrong as you are right. Once you are behind that curve in terms of that top-down macro call, then it is extremely hard to catch up,” he added.
Other funds currently holding large cash deposits include the £ 792.6m Miton Special Situations Portfolio and the £ 201.2m Miton Strategic Portfolio.
Both are headed up by Martin Gray.
The two funds have 26.9 per cent and 28.5 per cent in cash, respectively, as part of their total holdings.
Performance of funds vs sector over 3yrs
Source: FE Analytics
According to data from FE Analytics, the funds have underperformed their IMA Flexible Investment sector over three years.
Miton Special Situations Portfolio returned 5.27 per cent and Miton Strategic Portfolio returned 1.39 per cent over this time, compared with 16.88 per cent from the average fund.
Both funds are bottom-quartile performers over one, three and five years in their sector.
Gray remains bearish on the outlook for equity markets, as he explained in an interview with FE Trustnet last month.
Coombs holds the opinion that equities are still the asset class to be in in 2014.
He thinks that the general outlook is good enough for the US, Europe and Japan to provide a robust tailwind for equity markets, compared with corporate bonds and commercial property, where he sees lots of value traps.
“However, I’m not saying they [equities] are cheap, they are fair value at best. The facts are that the western markets are not cheap and even look quite expensive on a forward basis.”
“We really are reliant on earnings growth, but then I am a multi-asset manager, so my cup is always half empty.”
Clean share class ongoing charges are 1.79 per cent for the Rathbone Multi Asset Total Return fund and 1.59 per cent for the Rathbone Multi-Asset Strategic Growth fund, and both are available through Trustnet Direct.
