The manager admits that he doesn’t like running a high-level of cash in his funds and would prefer to be fully invested.Nonetheless, the potential for heavy losses has prompted him to hold 9 per cent in the money markets in his Rathbone Multi Asset Strategic Growth Portfolio, and 12 per cent in the Rathbone Multi Asset Total Return Portfolio.
Though he was made a number of acquisitions around the periphery of his funds recently, he is concerned that a lot of complacency has crept into the market, and thinks it is prudent to have cash sitting on the side-lines as a result.
“I suspect we will keep [cash] at this level for the next few months. Market liquidity is really poor at the moment and I’m convinced there is going to be a bit of a shake-up,” Coombs (pictured) said.
A number of managers have warned about the immediate outlook for risk assets.
Their primary concern surrounds the fact that equities have performed very strongly since the period after the financial on the back of mass easing from the world’s central banks.
Performance of indices since Mar 2009
Source: FE Analytics
Though there have been small falls this year, the US market has already broken through its record level in 2014 and the FTSE 100 – currently at 6,755 – has flirted with its all-time high for much of this year.
Sceptics of the rally say there is too much complacency from investors who expect markets to continue grinding higher.
This is demonstrated by the fact that implied volatility – as measured by the VIX – is at very low-levels.
Coombs agrees, believing that the tapering of QE and early interest rise in the UK and US could make the next few months uncomfortable for equity investors.
“When you look at it, volatility is very low and liquidity is very low and that doesn’t seem sustainable,” Coombs said.
“Of course, nothing could happen but normally when there is a combination of low volatility and a lack of liquidity there is a pretty nasty correction fairly soon afterwards; purely because there is no bloody liquidity.”
“That makes me nervous. I’m not trying to worry anyone, but the last time we saw this was in 2007.”
Coombs is very quick to point out that he isn’t forecasting a 2008-style financial crisis, however.
He has made a number of small acquisitions within his funds, such as buying the SQN Asset Finance Income fund, Barings Emerging Europe Investment Trust and the Tritax Big Box REIT.
However, with major headwinds facing both bonds and equities, he says a wholesale shift is very unlikely – unless valuations vastly improve in the aftermath of a sell-off.
“I just don’t think risk is being priced correctly and you’ve got to feel it is going to correct itself,” he said.
“Either, the market gets flooded with liquidity, which seems unlikely as the Fed is reducing quantitative easing, or we see more volatility.”
“I know is might sound strange, but there are more uncertain uncertainties at the moment.”
“You’ve got geo-political risk in Iraq and Ukraine, concerns over the future of interest rates, concerns about the growth trajectory in the UK and US, political risk with the upcoming general election and macro concerns about oil prices.”
“You’ve got all these factors and I just don’t risk is correctly priced.”
Coombs is head of multi-asset investment at Rathbones and currently manages three portfolios. They are all risk-targeted and all sit in the IMA Unclassified sector.
He launched his Strategic Growth Portfolio and Total Return Portfolio in June 2009 and his Enhanced Strategic Growth fund in August 2011.
According to FE Analytics, Coombs has returned 40.26 per cent to investors since he began running funds in the IMA universe, beating his peer group composite, which has returned 25.25 per cent.
Performance of manager vs peers since June 2009
Source: FE Analytics
Another manager who has built up his weighting to the money markets in recent months is Keith Ashworth-Lord.
Cash currently makes up 15 per cent of his five crown-rated Premier Conbrio Sanford Deland UK Buffettology fund.
Like Coombs, he’s sitting on the sidelines as he thinks equity markets are likely to fall when central banks tighten monetary policy.
When that happens, Ashworth-Lord (pictured) wants to be able to take advantage of lower share prices.
“The impact of interest rates on intrinsic value depends on the length of your holding period and how well you have estimated earnings and interest rates in the future. I am far from convinced that “Mr Market” is on top of this task at present and that is one reason I have allowed cash to build up in the fund,” Ashworth-Lord (pictured) said.“I want the fire-power to be able to buy great companies at knock-down prices as this current squall runs its course.”
FE data shows that the £17.7m Premier Conbrio Sanford Deland UK Buffettology fund, which mirrors the approach of legendary investor Warren Buffett, has been a top quartile performer in the IMA UK All Companies sector since its launch in March 2011.
Performance of fund vs sector since Mar 2011
Source: FE Analytics
It has returned 56.99 per cent over that time, beating the sector average by more than 20 percentage points.
