Investment advisers have a new tool in their box right now - cash, according to Kelly Prior.
The investment manager for the Columbia Threadneedle multi-manager team, said "handsome" overnight deposit rates, as well as a series of central bank base rate rises, had made cash attractive as a short-term portfolio tool.
She said while rates of 4 per cent could not offset inflation - which remains stubbornly high in many economies, not just in the UK with double-digit CPI - it provided a good opportunity for managers to lock in profits.
Prior told FTAdviser: "A key objective for any individual regarding their long-term savings is for the sum to retain its value in real terms.
We prefer to have more active defence.Ben Seager-Scott, Evelyn Partners"To many in the market currently this will be an unfamiliar objective, given the absence of inflation for over a decade.
"As recent figures have shown, we need to sweat every part of a portfolio to stand still right now."
So what does this mean for multi-asset fund managers?
Prior explained: "As investors we have to embrace the short term volatility that the newsflow brings, as this is when opportunity can be greatest for locking in long term investment returns.
"However, portfolio construction plays an important role in smoothing the bumps and there is a new tool in the box for us to use now - cash."
She said that overnight deposit rates of 4 per cent could "compete handsomely on a short-term basis in times of uncertainty", particularly when you throw trading costs and liquidity into the mix.
Central bank brakes
Moreover, she pointed to earnings outlooks, inflation and central bank policy, which are all much debated and potential sources of volatility in the near term.
She added: "While cash will not completely offset the effects of inflation, it is a little easier to be patient and pick your moment at the margin.
"That said, market timing is only easy in hindsight, so the long-term adage of time in, not timing the market need to be remembered."
This shift away from risk assets, as well as nervousness around continued central bank rate rises, might also explain the current lack of demand to issue new equity capital, particularly in the US.
Tatton's Lothar Mentel said issuance level among the mid-cap Russell 2000 Index companies has been "at very low levels since the start of the US Federal Reserve (Fed’s) monetary tightening".
This level is now 3.8 per cent of the Russell 2000 overall market capitalisation, which as Mentel points out, is "the lowest in the past 25 years, including the aftermath of the bursting of the dotcom era".
As a recent Columbia Threadneedle webinar put it, when central banks slam the brakes on inflation, something always crashes through the windscreen.
Other side of the cash coin
But Ben Seager-Scott, head of multi-asset funds for Evelyn Partners, said the company's central asset allocation guidance is currently to "have relatively little in cash".
He explained: "We’ve been seeking for the last few months to put some more of this to work, primarily in sovereign bonds (sterling-hedged US Treasuries or gilts).
"We’re keeping our equity weight about neutral, but favouring a balance of styles and sectors to include more defensive areas (such as healthcare and dividend payers)."
The company also has a reasonable chunk of its money in alternatives mostly in absolute return funds and a bit of gold.
Seager-Scott added: "More broadly, other multi-asset managers might be choosing to have higher cash levels to effectively ‘dilute’ risk on portfolios, or as dry powder to take opportunities.
"We prefer to have more active defence in our asset allocation."
