‘In­vestors have found a sure way to lose money’

The Daily Telegraph - Your Money - - FRONT PAGE -

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.

Com­mit­ting all your money to stocks is dan­ger­ous at cur­rent lev­els, pro­fes­sion­als tell Sam Brod­beck

Fear of an im­mi­nent mar­ket ‘cor­rec­tion’ ap­pears to have sub­sided – but are managers be­ing com­pla­cent?

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