In order to insulate portfolios against some of this extreme volatility and shelter clients’ capital, many managers upped their cash weighting to record levels in 2011 and the early part of 2012.
However, with politicians and central banks implementing policies designed to boost growth in the economy, a question has been raised about whether managers should be reinvesting their capital or holding onto cash to protect against the next downturn.
Julie Dean, manager of the five crown-rated Cazenove UK Opportunities fund, says she would not hold more than 5 per cent cash in her portfolio.
"I’m running a UK equity fund – why would investors want me to hold cash when they can do that themselves?"
FE Alpha Manager Iain Stewart sees cash as an asset class in its own right.
"Since it’s so expensive to hedge and bond yields are low and no longer risk-free, cash is a good way to dampen volatility," he said. "Cash also gives you an optionality to buy stocks more easily when they become attractive."
Richard Troue, analyst at Hargreaves Lansdown, echoes Stewart’s view, adding that it gives managers more flexibility to pick up attractively valued holdings in the current market.
"The key at the moment is remembering holding cash gives you a degree of optionality so you can buy in market dips," he said.
"There are certainly good opportunities around if you do have cash in the portfolio. I wouldn’t be rushing to become fully invested at the moment. I would be holding some cash to be ready to snap up attractively valued companies."
Troue believes progress has been made in terms of central monetary policies and political attitudes, but he warns the crisis is not yet over and there will likely be future buying opportunities.
"But if it is a more mainstream equity or bond fund, I would prefer to see it fully invested," he added.
Among the funds with the highest levels of cash is Troy Asset Management’s flagship £2.2bn Trojan fund. FE Alpha Manager Sebastian Lyon has increased his weighting to 24 per cent of assets under management.
The five crown-rated fund is a top-quartile performer over three, five and 10 years, but has slipped into the bottom quartile over the shorter term, delivering 6.45 per cent over one year, compared with an IMA Flexible Investment sector average of 17.51 per cent, according to FE data.
Funds holding more than 15 per cent cash
| Fund | Cash weighting (%) | Sector |
| Allianz UK Corporate Bond | 19 | Sterling Corporate Bond |
| Aviva Investors Multi Asset | 42 | Specialist |
| BlackRock Cautious Portfolio | 19.7 | Mixed Investment 20-60% Shares |
| Fidelity Emerging Asia | 31.5 | Asia Pacific ex Japan |
| Legg Mason Western Asset Global High Yield | 18.09 | Global Bonds |
| Newton Real Return | 20.3 | Absolute Return |
| Rathbone Global Opportunities | 17.41 | Global |
| Troy Trojan | 24 | Flexible Investment |
Source: FE Analytics
The £1.1bn BlackRock Cautious Portfolio also has a relatively high level of cash, after slightly increasing its weighting to nearly 20 per cent in the past month.
However, manager Adam Ryan has brought his cash level down from earlier in the year, having held nearly 27 per cent in June.
The BlackRock vehicle is a second-quartile performer over the five-year period, but has consistently underperformed the IMA Mixed Investment 20-60% Shares sector recently, delivering bottom-quartile returns of 5.67 per cent over the one-year term, compared with a sector average of 8.85 per cent.
The three crown-rated £6.3bn Newton Real Return fund, managed by Stewart, has consistently outperformed the IMA Absolute Return sector over all periods, delivering 17.02 per cent over the three-year term, compared with a sector average of 5.28 per cent.
Performance of fund vs sector and index over 5-yrs
Source: FE Analytics
The fund is currently holding roughly 20 per cent in cash, an overweight position for the sector.
The five-crown Trojan fund is currently closed to new investors, but the Newton Real Return fund has a minimum investment of £1,000 and an annual management charge (AMC) of 1.50 per cent. The fund’s TER is 1.61 per cent.
The BlackRock Cautious Portfolio has a minimum investment of £500 and an AMC of 1.25 per cent. The TER is 1.43 per cent.