‘Investors have found a sure way to lose money’
For months some fund managers have been warning that a stock market crash or “correction” is inevitable and imminent. But now it appears that, with British and US stocks still booming, these pessimists are re-entering the market for fear of missing out on investment returns.
Money managers responsible for more than £400bn of investors’ assets are holding just 4.4pc of their portfolios in cash on average, according to the latest global survey from Bank of America Merrill Lynch.
This is the lowest percentage recorded since October 2013, suggesting either that managers’ fears over the sustainability of buoyant stock markets are subsiding or that they are bowing to pressure from investors who continue to expect significant returns.
The Bank of America data shows that since early 2013 average cash holdings have increased (from a low of about 3.5pc) in line with the rise in the S&P 500, a key US index seen as the global stock bellwether.
However, towards the end of 2016, global managers began to reduce their cash holdings, while markets have kept climbing. Cash is now below the long-term average of 4.5pc, while the S&P 500 is at record highs.
Adrian Lowcock of Architas, the Axa-owned fund group, said: “Once managers increase their cash exposure it can be a very uncomfortable place to be, particularly when markets continue to reach new highs. In these situations a manager can lose more in missed investment returns waiting for the correction than if they stayed in the market, even in the event of a correction.
“If managers change their mind and reinvest they could be doing so just ahead of the market correction they were initially trying to avoid – a disaster scenario as it would mean not only that they have missed out on most of the market rally but could end up back in the market just in time to lose out from the correction.”
Mark Slater, who manages three popular UK funds run by Slater Investments, has reinvested cash from gains made earlier in the year. His £130m Slater Income fund now holds just 2pc in cash, against 12pc a few months ago, while Slater Recovery’s cash has fallen to 13pc from more than 17pc.
However, Mr Slater said his cash allocations were not based on views “related to the stock market as a whole”.
“Instead, we buy when we want at the price we want, which sometimes means waiting a while,” he said.
Yet some managers take a more cautious view and intend to retain a high allocation to cash.
Thomas Wilson manages F&C’s UK Alpha and UK Mid-cap funds. The funds, which invest in large and medium-sized companies respectively, hold a fifth (19pc) of their money in cash at the moment.
Mr Wilson is convinced that managers who remain fully invested have found a “certain way to lose money”.
He said: “We are adamant that the ‘fear of missing out’ attitude that seems to be driving much of what we are seeing in markets at the moment is a certain way to lose money.
“It is when others are taking on excess risk that we, as an investor, feel we should be reducing risk. That certainly applies now. While cash has an ‘opportunity cost’ [missing out on returns elsewhere], we believe it does not have the same level of risk as some UK stocks at the moment.
“The cash that we have in the funds will allow us to take advantage of opportunities when they inevitably occur.”
Certain categories of fund are always likely to have above-average cash positions. “Multi-asset” funds, for instance, can invest in stocks, bonds, other funds and cash.
Unlike funds purely focused on the stock market, which may be holding cash only while waiting to purchase new stock, multi-asset funds often make an active decision to keep cash.
The £350m Rathbone Total Return Portfolio is a conservative fund by design, targeting total returns two percentage points above interest rates while aiming to be far less prone to dramatic price fluctuations than the stock market. It currently holds 29.6pc of its money in cash or similar assets – the highest figure since its launch five years ago.
Will McIntosh-Whyte, the fund’s assistant manager, said it faced a “conundrum” about which assets to hold because bond yields had fallen while income from stocks was not predictable enough.
“With current bond and equity valuations as they are, we feel there could be opportunities to reinvest in the coming months, and cash gives us the freedom to move quickly,” he said.
“We’re not expecting interest rates and yields to balloon in the next few years, nor are we expecting rampant inflation. Consequently, our decision to hold larger amounts of cash is likely to be relatively shortterm in nature.” He said it was more “prudent” to “await a better time” to re-enter the market.
Another multi-asset fund, Henderson Core 3 Income, also has a high cash allocation, currently at 23pc. The manager, Nick Watson, said the high cash weighting was caused by taking profits from the stock market element of the portfolio last month.
“In the event of a sell-off in bonds, we would be actively looking for opportunities to deploy our current cautious levels of cash into these safe-haven assets at more attractive prices,” he said.
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