Canny advisers need to keep a close eye on cash

Canny advisers need to keep a close eye on cash

The use of cash in fund management portfolios is creeping up and advisers should pay more attention to this if it hasn’t flashed up on their radar screens already.

The much-respected Bank of America Merrill Lynch’s latest global fund management survey shows levels of cash are as high as they have been since the Lehman Brothers collapse in 2008.

The survey shows cash represents 5.5 per cent of the average investment portfolio and this chimes with the recent conversations my team and I have had with fund managers in the past few months.

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So why does this matter?

Well, cash can be a controversial topic. I remember a media roundtable where Rathbone Unit Trust Management’s global equities manager James Thomson got a bit of a dressing down by a journalist for harbouring, from memory, nearly 20 per cent of his fund in cash.

It turned out that part of the reason behind the journalist’s ire was that he was also a shareholder in the fund, but his point, to a degree, was a valid one.

Wasn’t he, as the investor, best placed to decide how much money he wanted in cash, something he could control by selling assets if he saw fit.

But cash can, as the saying goes, be king.

Miton used to be able to roll out what was undeniably a fantastic chart at presentations that showed how Martin Gray and James Sullivan’s cautiousness meant they fared extremely well during the credit crisis.

In 2008, the duo’s Special Situations fund returned more than 7 per cent in a year when the MSCI AC World index fell 20 per cent and the FTSE All-Share index plunged 30 per cent. Only two other funds in the sprawling ‘Cautious’ sector, to use its former moniker, produced positive returns that year – take a bow Ruffer and Neptune.

But managers can use cash at, arguably, the wrong time.

Schroders’ multi-manager team, led by Marcus Brookes, has had a high cash weighting in its flagship Diversity fund for some time. It now stands at about 30 per cent.

This has hampered the fund’s ranking in the peer group, dropping from top quartile in 2011 to bottom quartile in 2014.

This is quite an extreme example, but a portfolio holding one or two funds with 30 per cent cash, another with, say, 10 per cent, and another with 5 per cent, could erode the power of one’s investment.

Conversely, it could be a key driver of future returns as those fully-invested funds scramble to sell whatever they can during a crisis.

The point, I suppose, is that firstly advisers must have a view on this and secondly, they must be aware how much cash the managers they have invested with are holding, and why it might change.

Bradley Gerrard is news editor of Investment Adviser