Fund buyers have cautioned managers over continued high cash allocations, saying political risk and market volatility are not sufficient reasons to shy away from investing assets.
Global fund manager cash allocations reached record highs this summer, due to concerns over market drawdowns relating to the year’s major political events such as the EU referendum and US election.
Despite surprise outcomes from both events, equity indices have held up well in the aftermath, prompting wealth managers to renew their criticisms of cash holdings.
Fund managers have pointed to elevated valuations as one reason for high cash positions, but the tactic has provided them with more of a conundrum than if they had remained fully invested, according to Hawksmoor Investment Management chief investment officer Jim Wood-Smith.
“[The] problem is what to do afterwards. You either have to reinvest in a falling market if you’ve got it right – and no one calls market bottoms – and if you’re wrong you have to reinvest higher up.”
He added managers holding high cash levels are “trying to be cleverer than they actually are”.
Selectors have also countered the notion that a subsequent fall in risk assets would justify fund managers’ caution. Jordan Sriharan, senior investment analyst at Thomas Miller Investments, said significant cash balances elsewhere in clients’ personal wealth meant managers were effectively doubling up on such positions.
This suggested investments had become unaligned with clients’ overall interests, he added.
“Holding large amounts of cash and trying to time the market; we don’t think that’s a way to make money in the long term. They’re behaving a bit like short term hedge funds,” he said.
Managers have defended the stance, blaming a lack of conviction over the potential for future returns.
Legal & General Investment Management multi-asset fund manager Justin Onuekwusi said his cash holdings were due to a need to “pull back risk”, and a lack of confidence in a number of asset classes.
Allocations stand at 20 and 7 per cent in his low and high-risk portfolios respectively, the largest since the funds’ inception.
Alex Lyle, manager of the £732m Threadneedle Global Equity & Bond fund, which according to the firm still has cash levels of 8.1 per cent, added: “We are likely to see volatility [that] could result in more attractive levels to put the cash to work.”
Wealth managers remain unconvinced. Alan Beaney, investment director at RC Brown Investment Management, suggested high allocations signalled a fund’s underlying assets were overvalued.
“You are buying a fund to access the underlying investments and not to hold cash, which you can do yourself,” Mr Beaney said.
“If they are going to hold high levels of cash it would be fairer if they waived their management charges on this element of the portfolio.”
Cash held by multi-asset fund managers
|Morningstar category||Number of funds||Average assets under management (£m)||Average cash allocation (%)|
|Source: Morningstar, as at September 30 2016|