- With market uncertainty returning a number of equity funds are holding decent levels of cash
- We look at the reasons for doing this and some of the funds with higher cash levels
Times look uncertain and fund managers are hoarding the cash. That’s one big takeaway from October’s instalment of the widely followed Bank of America Global Fund Manager Survey: respondents’ cash levels have jumped to a 12-month high, reflecting a growing sense of pessimism about the outlook for future returns.
While holding some cash can be useful for private investors, high allocations to it in funds can result in complications as it skews their asset allocation and creates a potential drag on returns. But in times of high valuations and material uncertainty, fund managers with cash can 'buy the dip' if markets suddenly tank. Holding cash is also prudent for open-ended funds which invest in less liquid assets, as highlighted by the Woodford scandal.
With recent uncertainty in mind, we have identified a selection of equity funds with high stated cash levels. Some say that they are deliberately running high allocations for tactical reasons while for others this is an unusual level of cash.
Stashing the cash
The chart shows that many equity funds had high cash levels at the end of September. But this is only a snapshot in time: some funds temporarily have high allocations for structural reasons such as cash generated by a sale or recent inflows, and some of their weightings to cash may have since fallen. However, some funds' managers have pointed to a more deliberate approach.
EP Global Opportunities Trust (EPG), a global equity fund managed by Edinburgh Partners, had 28.9 per cent of its assets in cash at the end of September, up from an already high 23.3 per cent a year earlier. Sandy Nairn, lead manager of EP Global Opportunities Trust, notes: “The cash levels have been progressively growing, reflecting the ever more elevated levels of asset markets”.
He adds that he would look for a “significant” fall in the price of his target assets before putting the cash to work.
This highly defensive approach appears to chime with a contrarian investment strategy. This fairly concentrated trust has a bias to cheaper, less popular markets such as Europe and Japan, with barely any allocation to the US. But, as with other contrarian approaches, its performance versus peers has been poor in recent years.
Meanwhile, Judith MacKenzie, manager of Downing Strategic Micro-Cap Investment Trust (DSM), typically tends to hold between 8 and 12 per cent of its assets in cash. Her approach is partly an acceptance of the inefficient market in which she invests.
“This [approach] allows us to be opportunistic on bad days in the market in current positions that we know very well," she explains. "We often see mispricing or wide spreads occurring in inefficient micro-cap markets and once we have a core position we are prepared to exploit these inefficiencies. At the moment, we are certainly more defensive and therefore happy to be holding double-digit cash levels."
Staying selective
Some management teams partly attribute their high cash piles to a selective approach to stock picking. CFP SDL UK Buffettology Fund (GB00BF0LDZ31) had nearly 8 per cent of its assets in cash at the end of September and CFP SDL Free Spirit (GB00BYYQC271), which is run by the same team at Sanford DeLand, had an even higher 17.5 per cent cash weighting.
Eric Burns, chief analyst at Sanford DeLand, notes that high cash allocations have worked well for these funds' managers in previous sell-offs. For example, in the fourth quarter of 2018, CFP SDL UK Buffettology bought London Stock Exchange (LSEG) and Experian (EXPN) at “wonderful” prices and in the second quarter of 2020 its managers topped up on certain positions (see 'Buffettology and the road ahead' IC, 07.01.21) He attributes recent cash weightings to inflows and a disciplined investment approach.
“We won’t invest unless the price we are being asked to pay represents fair value against our discounted cash-flow derived assessment of the business’ worth,” he says. “A pullback in a number of share prices since September has allowed us to deploy more of that cash and the latest [reported] cash level of 17.5 per cent in Free Spirit has been reduced in more recent weeks.”
Similarly, Stewart Investors Asia Pacific Leaders Sustainability's (GB0033874768) managers attribute its cash weighting to a “bottom-up stock selection” approach, but add: “Valuations, especially of fast-growing companies, are rich and offer little protection against a fragile macro environment. Consequently, we are taking time to reinvest cash”. But this fund’s cash weighting is lower than it has been in recent years.
David Walton, who runs Marlborough European Multi-Cap (GB00B90VHJ34), says that its above-average cash position reflects a “highly selective” stock-picking approach.
Structural forces
Cash holdings can aid open-ended funds' liquidity. Take three funds run by Liontrust’s Economic Advantage team, which invest in smaller companies to different extents. A spokesperson said that Liontrust Special Situations (GB00BG0J2688), Liontrust UK Micro Cap (GB00BDFYHP14) and Liontrust UK Smaller Companies (GB00B8HWPP49) have high cash allocations so they can "invest in companies when they identify opportunities and to aid liquidity”, reiterating their position in 2020 (see 'When funds hold too much cash', IC, 08.02.20).
The ability to handle inflows and outflows of money is important for funds such as Liontrust Special Situations, which has substantial assets under management, but still delves into smaller companies. Investors’ Chronicle understands that the cash figures for the three Liontrust funds are within their normal range.
Sometimes funds have higher cash weightings simply because they have received investor inflows, as has happened to Unicorn UK Ethical Income (GB00BYP2Y515), exaggerating its cash position, or sold a holding. But in other cases it can be because of more complicated reasons. For example, Odyssean Investment Trust's (OIT) high cash balance at the end of September was because of the takeover of a holding – Vectura. But the trust deployed cash worth 6 per cent of its assets into a new investment two weeks later.
VT Downing Unique Opportunities Fund (GB00BHNC2614) has had “significant inflows” over recent history, although its manager Rosemary Banyard notes that she often has between 5 and 10 per cent of the fund's assets in cash. MFM UK Primary Opportunities (GB00B905T773), a fund we recently highlighted, has enjoyed some recent inflows. Yet its managers also took some profits on the back of strong markets with an eye to participating in future initial public offerings (IPOs) and share placings.
FP Octopus UK Micro Cap Growth (GB00BYQ7HN43) has also had strong inflows. But its manager Richard Power is being "patient" about how to deploy the cash in light of market volatility, and a high level of IPO and merger and acquisition activity recently. Mobius Investment Trust (MMIT), meanwhile, sporadically takes profits on holdings leading to fluctuating cash levels.
