At times of uncertainty many fund managers turn to cash to shore up their portfolios. Keeping money in the bank can help to limit volatility and also means investors have cash ready to put to work if they spot an opportunity.
Berkshire Hathaway (BRK.A), the investment holding company run by infamous investor Warren Buffett, is currently running record levels of cash in its portfolio. Almost £100 million of the firm’s £546.7 million of assets are in cash, with the renowned investor recently informing shareholders he and his business partner were struggling to find “good acquisitions at sensible prices”.
It could be a stark sign of rocky times to come – other instances that Berkshire Hathaway has amassed large cash piles include in 1999 before the dotcom bubble burst and between 2005 and 2007, ahead of the financial crisis. He’s certainly not the only investor taking steps to protect his portfolio.
David Moss, manager of the F&C Mid Cap fund, has been running a high level of cash in his portfolio for around 18 months. Cash levels in the fund, which has a four-star Morningstar rating, peaked around six months ago when cash accounted for around of 20% of assets, falling to around 7.5% today.
Moss says: “If we can’t find quality businesses at sensible prices to invest in then we think it makes more sense to hold on to the cash. We can’t lose money on cash but stocks have upside and downside risk.”
But some investors might argue that it makes little sense to invest in a fund where the manager is not putting his assets to work; they could simply put cash in their own bank account – and not have to part with a pricey fund management fee for the privilege of doing so. After all, what’s the point of paying a manager to make an investment that can’t deliver a return?
Moss says: “We’re open about the level of cash we hold but investors can be sure that we’re in a position to take advantage of opportunities when they arise. We want to protect capital and we would rather do that by holding cash and waiting for opportunities than feeling rushed to invest.”
JOHCM UK Opportunities fund co-manager Rachel Reutter has a philosophy of “capital preservation first, capital growth second”, which tends to lead to periods of high cash levels in the portfolio. The fund will sell a holding if it no longer meets its strict criteria, holding cash until a suitable replacement is found.
Are Negative Equity Returns Ahead?
Reutter says: “Currently, each stage of our investment process is screaming red.” She is concerned about the effect of global tightening on indebted governments, companies and consumers, as well as geopolitical uncertainty and stock markets being driven to “extreme highs”. “We think equity returns over the next decade will be negative”, she adds.
Against such a negative backdrop it’s perhaps unsurprising that the fund, which has a four-star Morningstar rating, is currently holding its maximum cash level – a hefty 29%. While some investors could take that as a sign to sell up, others will trust to their fund managers to make the correct calls when the time is right.
Reutter explains: “Being able to hold cash gives us the flexibility to sell companies when we need to and the firepower to buy high-quality companies at the right price when the opportunities present themselves.”
Moss has certainly been starting to find those opportunities once more. He has put his cash to work, adding to holdings in housebuilder Bovis (BVS), wealth manager Brewin Dolphin (BRW) and insurance group Beasley.
He has also recently bought shares in packaging company Smurfit Kappa (SKG); the fund had previously invested in the stock but sold out when shares soared as a US firm made a bid for the company. Moss took the opportunity to re-invest after the deal collapsed. Another recent investment is in brick maker Ibstock (IBST), whose shares suffered a setback when earnings for business were downgraded as it revealed maintenance spending at its plants had increased.
Keith Ashworth-Lord, manager of the Castlefield UK Buffettology fund, is another investor who has been adding to his cash piles – perhaps no surprise given the fund is run according to the investment philosophy of Mr Buffett himself. Around 12.5% of assets are currently in cash as Ashworth-Lord points out that it is “quite hard to find value in the market at the moment”.
He adds: “Usually it’s a sign that a correction is coming – we had 18% cash in 2014 and there were three flash crashes that year.” Brexit, trade tariffs and monetary tightening are just some of the issues concerning him at the moment but he says it’s wrong to obsess about such macro problems: “I just think, no problem, if there’s a market correction or a recession it just means I can buy things at a lower price.”
