Investec UK Special Situations and JOHCM UK Opportunities are among the UK All Companies funds sitting on bulky cash piles allowing them to swoop in on the correction hitting UK equities, according to research from FE Trustnet.
Since the end of April the sorry state of Chinese growth and Greece’s perilous political position have meant the bullishness that propelled the FTSE 100 to reach its highest ever level of 7,104 points has been replaced by full-on bearishness.
UK equities have generally been deteriorating over this period but it is the large-caps in the FTSE 100 that have been hit the hardest. The FTSE 100 is now down more than 10 per cent (our data does not yet include this morning’s falls).
By contrast, mid and small-caps have fallen much less with the FTSE 250 down just over 2 per cent and the FTSE Small Cap index down just 0.88 per cent.
Performance of indices since 27 April 2015
Source: FE Analytics
In timely fashion, cash is now at its highest average weighting for at least three years in portfolios within the IA UK All Companies sector, according to our data.
Having a high weighting to cash is usually a strategic move due to the belief that the market is heading for a correction, meaning while the fundamental case for a stock remains the investor suspects in the short term it may become cheaper.
Alternatively, a manager may hold a lot of cash to protect capital in the face of a prolonged bear market in which case, despite the corrosive effect of inflation on value, it is still preferable to holding stocks.
While the average weighting to cash in the IA UK All Companies sector is 4.6 per cent, up from 2.5 per cent in April, the likes of Alastair Mundy, manager of the £1.3bn Investec UK Special Situations fund, has much more.
Mundy currently has about 12.2 per cent in cash, which is slightly lower than the 12.7 per cent he had in April, his highest weighting for at least three years.
The manager has headed up the fund since 2002 and built up a reputation for a value/contrarian style, meaning he has seen some periods of underperformance when markets have rallied.
Over the longer term this strategy has paid off, with the fund returning 231.17 per cent since 2002 while the average IA UK All Companies fund has returned 180.58 per cent and the FTSE All Share has gained 182.19 per cent.
Performance of fund, sector and index since 2002
Source: FE Analytics
Mundy’s team is poised to enter the market, having not used their cash pile yet. They said: “You can move existing holdings to take advantage of relative moves in a falling market, but the real value comes from buying cheaper stocks from cash.”
“For this reason we think that there is a good investment case for cash within funds, especially when markets look relatively expensive as they have to us for a while.”
“It obviously acts as a drag on the way up, but used well it should more than compensate for this when put to use in times of panic. We have not yet used this firepower.”
Mundy is not the only manager to hold lots of cash. FE Alpha Manager John Wood, who heads the JOHCM UK Opportunities fund, has a whopping 18.12 per cent although this is around his usual weighting.
The fund is top quartile since launch in 2005 and our data shows it was also top decile performer in 2007’s tempestuous market and 2008’s crash. Wood also made a positive return in 2011 when the European sovereign debt crisis meant a large fall for the FTSE.
This was also the last time the manager put his cash to work, buying up stocks as they fell. Other funds with high weightings are shown below.
Source: FE Analytics
David Madden, market analyst at IG, says the recent weakness in UK equities is driven primarily by China’s apparent lack of control of its turbulent equity market, which soared almost 200 per cent in one year before nose-diving for the past few months.
“Stock markets around Europe are suffering because the decline overnight in the far east has spooked dealers in the west. The great worry is that China will undergo a dramatic drop in the rate of growth and the knock-on effect to Europe will damage the recovery,” he said.
“It used to be just Australia that would catch a cold when China sneezed, but the Chinese sell-off is far more infectious than initially thought. We won’t see the impact of the Chinese currency devaluation for a few more months and when it does trickle down it will be painful,” he added.
The Chinese authorities have tried to bolster confidence by implementing a series of measures, including suspending new share offerings, ordering brokers to buy shares and increasing liquidity provision as well as halting trading in more than 1,000 firms’ shares.
However, the market seems to remain unconvinced, believing that the once tight grip of the Chinese authorities has lost its ability to control fundamentals.
The market’s China concerns are also added to a broader spectre of increasing uncertainty about the US Federal Reserve’s rate rising plans.
The latest BofA Merrill Lynch Fund Manager Survey also showed that average cash levels globally in portfolios stands at 5.2 per cent, easing from July’s 5.5 per cent but still high by historical standards.