Cash is king in uncertain times TAKING

CONSTANTLY assessing the risks and returns of individual investment opportunities and being flexible are central to successful investing, and this is especially true when asset prices change rapidly.

As asset prices reflect swings in sentiment between optimism and pessimism, and in extreme cases between fear and greed, it is possible to improve the chance of strong future investment returns by buying when a stock is out of favour and the price is depressed.

Similarly, as an asset becomes more popular and its price rises, future expected returns will diminish.

An asset manager’s ability to be flexible and capitalise on cyclical swings is enhanced by having cash at its disposal.

We think that the value of cash is tremendously underappreciated.

Not only is it a buffer against unforeseen future events, but it also provides firepower just when you need it most.

While cash may not yield much above inflation most of the time, having it on hand allows you to deploy it in the inevitable moments of panic.

In times where higher-quality businesses are popular and prices are high, you can expect us to be sitting with large levels of cash in the funds that allow this.

Cash levels in our funds will be rising when stocks are getting more expensive and future returns are diminishing.

However, we will employ that cash aggressively when panic sets in. At the end of the day, uncertainty and risk can actually provide investment opportunities, as the prices of quality securities are driven down.

For example, at the start of 2008 our multi-asset portfolios held a lot of cash – the PSG Flexible Fund had more than 30% of its fund value in cash. This reflected our assessment at the time that valuations and risk were elevated for much of the stock market.

The global financial crisis provided an opportunity to employ cash aggressively as good companies went on sale.

By the end of 2008, the PSG Flexible Fund was 95% invested in equities.

In recent years we have been buyers of cheap stocks that have fallen out of favour. In South Africa, for example, investors are made aware of the uncertain macroeconomic environment and political risks daily.

This uncertainty and risk has provided the opportunity to invest in high-quality businesses.

At the same time, our clients have had very little exposure to overpriced blue chips.

Globally, we think that current dispersions in valuations on international stock markets will reward careful stock selection in the years ahead.

With relatively high levels of cash on hand in our multi-asset funds, we are ready to seize future opportunities. Shaun le Roux Stock