Fund Selector: Large cash position pays off

It finally appeared somewhat vindicated in August as stockmarkets went haywire when the reality of the Chinese slowdown kicked in.

Throughout 2015 we had been holding cash in lieu of bonds, but also in lieu of equities where we felt valuations had been looking overstretched for some time. Indeed, in early August we had been trimming our equity exposure even more.

As stockmarkets fell sharply – at one stage in August the FTSE All-Share index was down 11.8% for the month – those who were fully invested in equities had nowhere to hide.

While we also posted a monthly loss, our defensive positioning meant the losses were restricted compared with our peers and greatly improved our year-to-date performance numbers.

Furthermore, we had no direct exposure to emerging markets and Asia, which were at the epicentre of August’s turmoil. The MSCI Emerging Markets index was down 15% at one stage in the month.

However, we are not becoming complacent and are all too aware that in such a volatile climate, this month’s shrewd investor can look like next month’s fool.

Although we are happy to maintain a large cash position and minimal exposure to bonds at this time of heightened volatility, we are not dogmatic about this and we are constantly on the lookout for value opportunities.

Our favoured equity markets are still Japan and Europe, but market moves are opening up other potential pockets of value.

Emerging markets is one such area, and late in August we dipped our toe into the region for the first time in a long while, making small purchases in the Findlay Park Latin American and Artemis Global Emerging Markets funds in one of our portfolios.

This is just a baby step for now and more a statement of intent than an attempt to call the bottom of the market, but it reflects our willingness to change the flavour of our equity exposure when the time is right.

We are also monitoring the commodities sector closely. The consensus has it that the US dollar will continue to be strong, which will be a nightmare for emerging markets and commodities.

But trade-weighted, the US dollar seemed to peak in March and April, and it performed poorly in the August sell-off. It could be that the currency has already peaked. If so, this could provide some respite for both commodities and emerging markets.

We think the events of August occurred because markets had become richly valued at a time when earnings revisions were looking poor and macroeconomic data from China was worsening. We suspect the losses were just a natural and necessary correction, which has taken away some of the “froth” in valuations.

Investors are now focusing on when the US Federal Reserve will raise its interest rate, with some believing it cannot happen this year.

While we think it made a policy mistake by not increasing the rate in 2013, we also believe that when it comes a 25 basis point rise will not be enough to cause a global recession.

Marcus Brookes is head of multi-manager at Schroders