Investors fret over the withdrawal of emergency monetary policy support or “QE tapering”. Commentators talk of a “healthy correction” – the polite euphemism for a market fall of up to 10 per cent – followed by the inevitable reference to “buying opportunities”. For millions who invest through unit and investment trusts, this opens up a contentious issue: should the funds they invest in hold – or not hold – cash in their portfolios?
In the early 1970s, when stock markets were plunging in the worst bear market since the 1929 crash, I remember a fiery argument with a fund manager who had remained fully invested. I could not understand how his fund had not sought to mitigate the damage by building up cash. Fund managers are, after all, paid to manage. Investors rely on their professionalism and expertise to decide when and when not to hold shares and provide some shelter for investors during a market storm. This particular fund manager was virtually 100 per cent invested during 1973-75 while the market crashed by more than 70 per cent. Surely he should have moved heavily into cash?
“Not my call” was the response. He was running an equity unit trust for investors who wanted to hold equities. If investors wanted to hold cash, that was their call and they should arrange their finances accordingly. His fund offered exposure to equities and that is what he was mandated to provide.
And, to be fair, many investors support this principle. How irksome do we find it when, in rising markets, our fund manager has been sitting on cash levels equivalent to between 5 and 15 per cent of the fund, thus failing to take full advantage of the market rise. We pay fund managers to make our money work, not earn lazy fees for sticking a slice of our investment in a deposit account.
While I appreciate the point, I still believe managers should take a view on our behalf as to when – and when not – to be fully invested. The vast majority of investors have neither the time nor the aptitude to make such decisions, that’s why we turn to fund managers.
The argument has even greater force when we hear familiar refrains as “buying on dips” and “taking advantage” of those “healthy corrections”. This presupposes that the fund manager has cash in reserve. So, on this analysis, and in today’s unsettled conditions, investors may want to check the cash position of an equity fund to see how opportunistic the manager can really be.
While most funds are committed to the “fully invested” school, there are a number of managers who have entered this tricky period with cash levels of up to 25 per cent.
Research by FE Trustnet has identified several high-profile managers who have taken the view that the market is over-valued and who have built up significant levels of cash. Conspicuous among these is the £1.2 billion UK Opportunities fund. It has more in cash than any other in the Invest Management Association UK All Companies sector, at 19 per cent.
Manager John Wood says elevated valuations have forced him to build up the weighting. The fund outperformed its benchmark last year in spite of its cash overweight. Over the seven years of Wood’s tenure it has returned 102.5 per cent compared with 68.3 per cent from the All Share.
The CF Ruffer Equity & General fund uses cash even more strategically, with a cash weighting at 28 per cent. Manager Alex Grispos seeks to sell shares as markets rise, build up his cash exposure and put this to work when markets fall. FE data shows that the strategy has paid off since he started running it in March 2007.
Other funds with high cash levels include the Somerset Emerging Markets Dividend fund with 16.5 per cent – well timed given the recent sell-off in emerging markets this year.
Nearer home, First State’s Angus Tulloch has a 13.6 per cent cash weighting in his Scottish Oriental Smaller Companies Investment Trust.
Other vehicles with relatively high cash exposure include Investec Special Situations with an 8.4 per cent cash weighting and that enduring behemoth of the investment trust sector, Temple Bar, with 12 per cent in cash. Both are stewarded by “deep value” investment manager Alastair Mundy. His readiness to use cash helped Temple Bar to resilient performance in the slides of 2008 and 2011. So – cash can work to boost equity fund returns.