Cash is king as other safety nets lose appeal; Making the most of manager retirements
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Cash rules the roost
Fund managers don’t appear to be particularly worried by elevated company valuations or renewed nerves over the economic backdrop. Last month’s Bank of America industry survey found average cash levels had crept up during the summer – but only slightly.
The typical fund held 4.2 per cent in cash as of August, according to BofA. That’s the highest level this year, but still well below the 5-6 per cent mark seen for most of 2020.
Many wealth managers, tasked with running balanced portfolios, are more cautious. Our asset allocation database shows cash weightings rising more notably this summer. And while they’re still a relatively small part of portfolios overall, some fund selectors are giving further thought to the issue.
Rathbones head of multi-asset investments David Coombs has held elevated amounts of cash on more than one occasion in recent years. His portfolios have also tended to use put options as another form of protection.
Of late, however, cash has trumped even this latter option. Coombs notes that put options are based on indices rather than highly valued companies in particular. He also points to the fact that a rise in the Vix index has increased the cost of these options of late. As a result, Rathbones’ multi-asset team has “been adding only to cash in recent months”.
It's not as if every single defensive option is redundant: Coombs does also own short-dated government debt alongside this position, as part of a “high(ish) growth and high liquidity” strategy. But for certain buyers, cash really is king at the moment.
Retirement planning
An addendum to the latest manager move story we touched on yesterday, following the retirement of Artemis’ James Foster. Quilter Cheviot head of investment fund research Nick Wood has been considering the idea of departing managers from just this standpoint.
How should fund selectors, he asks, think about cases where a manager is “likely to retire in the next five years”?
Wood says such moves are slightly more predictable than occasions when fund managers move company. In the UK, managers reliably tend to retire around the 60-65 mark – though in US investors’ case there is a certain willingness to continue for as long as humanly possible.
Retirements can also mean less erratic fund flows, according to Wood. Successful managers will have held some of their assets for years if not decades; many of those investors will be relatively apathetic about the future of the strategy, if they still monitor their holdings at all. So liquidity risk is often less of a problem in these cases.
There’s one more piece of the puzzle to ponder. Yesterday we discussed how fund management successors can do better than anticipated. And there is another counter-intuitive factor to consider, according to the Quilter man.
A change of manager can lead to style slippage, but in some ways this might be a sensible move: “allowing the new manager to express their investment views in their own way might result in a better outcome”.
Taper twist
After a period in which US policymakers began “talking about talking about tapering” for the first time, attention has lately shifted to the European Central Bank’s own plans on this front.
Today was supposed to be the big day, but in the event, the ECB has been even more oblique: president Christine Lagarde insisted “the lady isn’t tapering”, even as the central bank announced a gradual scaling back of its bond buying programme.
In fairness, most analysts agree: a slowdown in purchases is not the same as ending those purchases, and the ECB is expected to continue buying in some shape or form for several years yet.
There will be more stopping and starting along the way, of course. When it comes to central bank largesse, today might ultimately mark the end of the beginning if not the beginning of the end.
