UK fund managers are holding onto cash to avoid buying what they believe are overvalued and overpriced UK equity stocks.
Keith Ashworth-Lord, founder and managing director of Sanford DeLand Asset Management (SDL), and manager of the SDL UK Buffettology Fund, is currently holding 16.87 per cent in cash.
His colleague Rosemary Banyard, who runs the SDL Free Spirit Fund, has 15.7 per cent in cash.
According to Mr Ashworth-Lord, the high cash holdings are mostly down to investor inflows, rather than the managers making stock decisions to sell, but the reason the holdings have not decreased is because the managers are waiting for the right investment.
He said: "It's not a mark of bearishness", but rather a lack of truly quality companies available in the UK outside of the ones already in the fund.
He said it was important to keep cash ready to invest in the sort market-leading companies with high long-term growth potential they would want to have in their portfolios.
In fact, he would rather continue to invest in companies he already holds, rather than make new investments "just for the sake of being invested".
Moreover, the managers claimed the sharp rises in the FTSE 100, as well as continuing upward revisions in earnings ratios, might belie the actual quality of many companies listed on the London Stock Exchange.
Mr Ashworth-Lord commented: "It's a fool's errand to forecast markets and invest based on pre-determined criteria. I don't want to invest in any old thing; I want it to be good.
"I don't want to invest in something that will affect diversification and correlation; I want a company that has an asset or know-how or a product that differentiates itself from the others".
He pointed to Games Workshop as an example, which he said has "captured a piece of the market" and has so far been a stand-out performer.
During October, the stock rose 15 per cent and is now 3.34 per cent of the fund.
To hold high cash levels like these is a pretty punchy call but you know, this could prove correct. We have been raising cash but this is more a call on the inflated fixed income market than the equity market. Mark PreskettInstead of focusing on earnings, the team focuses on companies which have high cashflow, strong balance sheets and managers "who behave like an owner of the business", Ms Banyard, said, adding that SDL was following the theories of investing set out by veteran fund managers such as Warren Buffett of Berkshire Hathaway.
Not all fund managers or analysts believe the UK market is overblown - or at least not in the main.
Mark Preskett, portfolio manager at Morningstar said: "To hold high cash levels like these is a pretty punchy call but you know, this could prove correct. We have been raising cash but this is more a call on the inflated fixed income market than the equity market.
"We are marginally underweight equities across our suite of portfolios, as we think in aggregate, equities look a little overvalued, but relative to history we do not see this at extremes yet."
Going by the cyclically adjusted price-earnings (Cape) ratio, based on ten-year average earnings, the average is 16.
Current estimates put the Cape ratio of the FTSE 100 only marginally more expensive at 16.5, although some market commentators have questioned whether the market's strong run might tail off, rather than continue.
By comparison, in December 1999, when the long-term average was 32. Conversely, when it reached a nadir and fell below 3,700 in March 2009 - and the Bank of England cut interest rates to 0.5 per cent - the Cape ratio was 8.
Given this rough average, the UK market in aggregate does not look overvalued, but there is a difference between large and small-cap stocks, and between sectors of the FTSE 100 which had been undervalued and were now being revised upwards, and those which could be set for a slight downward revision.
According to Mr Preskett, UK equities, particularly large cap, are offering quite good value at the moment, although smaller caps may be more overvalued and would need to be looked at carefully.
He explained: "Large caps are operating in a very international market and trading on good valuations at the moment. We might even expect to see upward revisions in earnings in sectors such as energy and financials and, to a lesser extent, basic materials, and this is the reason for the poor earnings growth for the UK in aggregate over the past five years."
Mr Preskett added: "UK EPS has risen 38 per cent over the past 12 months, which is double the 12-month EPS growth seen in the US or emerging markets, and we expect this recovery in earnings to continue. This is one of the key reasons we have been adding to UK large caps in recent months."
However, Mr Ashworth-Lord is sceptical about using EPS growth rates, preferring instead "cash returns on invested capital", and quality companies to ones that look good based on "predetermined criteria".
Other fund managers earlier this year told FTAdviser they had started to take some risk off the UK equity table and get cash ready for a better buying opportunity, believing the rise in UK earnings per share (EPS) that has been seen over the past 12 months might not continue.
In September, some commentators advised older investors in particular to start taking some risk off the table and making sure they had some cash or cash-like exposure within their portfolios.
simoney.kyriakou@ft.com
