Market valuations, strong inflows and a lack of new ideas are among the reasons some of the top UK managers have taken higher cash positions than usual. 
With numerous sources of uncertainty, including European elections, the triggering of Article 50 and a Donald Trump presidency, it may be understandable that some managers wish to take risk off.
Over the past few years the average cash weighting of the IA UK All Companies sector has fluctuated a little, but has been in a band of between 1.78 and 3.30 per cent.
Despite this, a number of top rated funds hold significantly more in the money market than this, as the below table shows. For the purposes of this article we have only included funds with either a five crown rating or that are run by an FE Alpha Manager.
Cash weighting of funds according to their latest factsheet
Source: FE Analytics
The fund with the highest cash position is the five crown-rated JOHCM UK Opportunities run by FE Alpha Manager John Wood, Rachel Reutter and Michael Ulrich.
In the latest factsheet, the managers noted: “There remains no value in this market and we continue to stick to our valuation discipline than fold just as the craziness reaches its peak.
“After all, when uncertainty rises, assets prices should fall, and clearly the world has uncertainty in abundance if President Trump’s first full month in office is anything to go by.
“Nonetheless, markets remain Teflon-coated, for the time being at least. We cannot do anything about the big items in the world’s in-tray as we start 2017.
“But we will be focused on identifying those market-leading companies that have strong balance sheets and the pricing power that allows them to produce compounding growth over the long haul, while being mindful of any dilution in the prospects of our existing portfolio names.”
The £1.8bn fund, which traditionally has a higher cash weighting than most as the managers are not afraid to wait for buying opportunities and will not invest more than they deem appropriate, has 28.1 per cent in money market holdings – 25.59 percentage points more than the sector average - with 12.8 per cent in cash and 15.3 per cent in short-dated UK Treasury bills.
This means however that the fund, which must hold at least 80 per cent in UK equities to qualify for the IA UK All Companies sector, is currently 8 per cent under this allocation. JO Hambro were unavailable for comment when contacted by FE Trustnet.
The next highest cash position in the group is the £260m GAM UK Diversified run by FE Alpha Manager Andrew Green, which had a 14.92 per cent cash weighting, according to its latest factsheet, although this has been brought down to around 12 per cent since.
“While the cash balance of 12 per cent is currently above average, it is not dramatically so, and the fund has historically been managed with a relatively high cash weighting,” Green said.
“We believe the fund has the ability to outperform despite this holding in cash, and this is exactly what the long-term track record shows.
“Cash provides balance to the portfolio and flexibility to invest in situations typically thought of as deeper value. This barbell type approach helps to smooth volatility in the short-term, and also allows us to take a longer-term perspective where we would not wish to be forced into selling prematurely.”
The fund is above the sector average and has beaten its benchmark over the last five years, as the below graph shows, though it lags both over a 10-year timeframe.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Currently, the manager says the high cash position is due to a lack of ideas with which to invest in as well as a nod towards capital protection.
“Cash balances that are slightly above average mostly reflect a bottom-up difficulty in finding new ideas that offer compelling value at the current time,” he said.
“We do have a significant position in financials however, which we feel not only still offers considerable value but also represents a contrarian positioning for the fund.
“While the UK market as a whole is neither obviously cheap nor expensive, after a strong rally and at all-time highs there is also a modicum of top-down caution in the current cash weighting.”
Elsewhere, Keith Ashworth-Lord and Liontrust’s Economic Advantage investment team say their large cash positions are primarily due to strong inflows seen since the start of 2017.
FE Alpha Manager Ashworth-Lord, who runs the CFP SDL UK Buffettology fund, said: “We have been increasing existing holdings selectively and added Revolution Bars to the portfolio. However as fast as I have invested cash more has come in.”
The £111m, five crown-rated fund is third on the list with a cash weighting of 11.35 per cent.
Meanwhile, Liontrust’s Economic Advantage investment team, which includes FE Alpha Managers Julian Fosh and Anthony Cross, said: “Cash weightings do not reflect directional market views or attempts to provide downside protection.”
They run the five crown-rated, £2.5bn Liontrust Special Situations, which is sixth on the list with a cash position of 9.47 per cent – one of two Liontrust funds along with Liontrust UK Growth.
“Current cash levels are above average, reflecting the effect of fund inflows and investment decisions to reduce certain individual holdings,” the managers said.
“We do not view liquidity as constraint; however, the nature of stock sales is that cash receipts are realised fairly rapidly – especially, for example, in the case of a takeover– whereas with new holdings we tend to build up our positions slowly to be mindful of the market impact of our investment.
“We would expect the funds’ cash weightings to now trend lower; since the end of February the Liontrust UK Growth fund’s cash weighting has roughly halved as funds have been managed into existing holdings.”
Sandwiched between the two funds above is the five crown-rated Jupiter UK Special Situations run by Ben Whitmore.
All three funds mentioned above are ahead of the sector and benchmark over five years, as the below graph shows, sitting in the top quartile of the IA UK All Companies sector.
Performance of funds vs sector and benchmark
Source: FE Analytics
The £1.6bn Jupiter UK Special Situations has a cash weighting of 11.11 per cent and the manager says while this is not normal, it is dictated by the level of market valuation.
“At the moment the Graham and Dodd PE for the US stock market is 28 times which is high (on a like-for-like basis the median Graham and Dodd PE for the UK is approximately 22 times). This measure has only been higher in 1929 and the very late 1990s,” Whitmore said.
“This high level of valuation warrants some caution as it indicates, on average, low future returns. The last time the fund had this level of cash was in 2007 (for example at the end of July 2007 it was just over 12 per cent).”