Fancy a 8% rate of interest with minimal risk and capital preservation? Just seven years ago you could walk into a high street bank and get just that on a cash savings account. But times have changed. We are now three months away from the five year anniversary of Bank of England base rate being dropped to just 0.5% - which even after yesterday’s announcement that UK inflation had fallen to just 1% is still a negative real rate of return.
So why are two reputable fund managers lauding cash as king? Bill Eigen, famed fixed income investor who works for JP Morgan has taken his unconstrained bond fund to an incredible 90% cash in the past – peaking in 2007. He now holds 55% of his fund in cash as he prepares for what he calls “double digit devastation”, that is the effect rising bond yields will have on prices.
Eigen predicts that 2015 will be worse than 1994, when bond markets suffered considerable losses as central banks raised interest rates.
“You are going to get to a point soon where long-only bond funds will not make money. You need to be able to short the market and if you don’t have that toolkit you’re out,” he said at a recent conference in New York. “Fixed income does not have the ability to make back losses like equities.”
Schroders fund manager Marcus Brookes holds Eigen’s fund in his Morningstar Analyst Bronze Rated Schroder MM Diversity Fund, and has adopted the fixed income manager’s stance on cash. Thanks to the position held by Brookes, and Eigen’s fund’s contribution, MM Diversity has a 40% cash holding. This is significantly more than a cash buffer – two fifths of your entire portfolio is active asset allocation.
What does Brookes say to those equity managers who claim cash equates to a guaranteed capital loss?
“Right now cash is safer for capital preservation than bonds,” he argues. “The bond market is telling us there is a recession, while equity markets are saying there is a party. Quantitative easing has decoupled markets and while we may not be able to call it exactly, at some point yields will rise and we don’t want to be exposed to those losses.”
The central bank fuelled decoupling is evident; while the US 10 year Treasury Bond yield has fallen since 2010, the S&P 500 has more than doubled in value – this year alone the S&P 500 has reached 47 all-time highs. It has been a 67 year bull market, with more IPOs in the first quarter of this year since the tech bubble – and bear Brookes points out that three-quarters of these companies had no earnings.
“We are negative on corporate debt, government debt, property and US equities,” said Brookes. “We are positive on Japanese and European equities, and cash is king.”