Back in August 2008, I wrote a piece with this very headline. It made more sense then. At the time cash could earn you in excess of 7% in a savings account if you shopped around.
I was just 26 and I remember thinking that looked pretty attractive. Little did I know there was a possibility I would not see those kinds of cash yields in the developed world again in my lifetime.
Sure, that statement might be a little premature – but today you would be lucky to get a savings account giving you 1.5%. So why on earth would I chose to write an article with this headline today?
Back then what prompted the article was that I had observed a host of high-profile portfolio managers slowly but surely taking money out of the market. Despite today’s unattractive cash yields, are managers withdrawing again?
Managers talk a lot about how markets look rich at the moment, but are they actually reducing their exposure?
I focused on the 12 active domestic equity categories – the Large, Mid, Small and Multi-Cap peer groups and the three style disciplines within those (Growth, Core and Value) – to see whether cash allocations are on the up.
The top-down results show little movement, with cash positions changing by a negligible amount over the period. Seven of the 12 categories have actually seen a reduction in the amount held in cash. The category with the largest change was Large-Cap Value, which is now the most fully invested peer group of the bunch, with less than a third of a percent (0.31%) in cash, down from 0.97% at the end of March.
Given how much Large-Cap Value has lagged Large-Cap Growth this year alone, that is perhaps not a surprising statistic. The Russell 1000 Growth index is up 25.4% year-to-date, while the value index has added just 8.7% to investors’ returns.
Conversely, Large-, Mid- and Small-Cap Growth managers have started to take a little off the table at 0.06%, 0.29% and 0.23% respectively. However, these numbers are hardly large enough to suggest that investors are becoming more cautious and stockpiling the liquid asset. So why are managers remaining mostly fully invested?
There are several reasons. Firstly, investors can be vociferous if their chosen active managers are not fully invested or close to it at any one time. Redemptions have also lessened this year, so there has perhaps been less requirement to have a capital buffer. The big factor though is the fear of missing out; after all, active managers in these sectors have been missing out for much of the post-credit crisis period. Taking a cash position in a world where it earns you negative real returns is a big call.
At a portfolio level within the large-cap categories, the biggest absolute change over the past six months has been in the Investment House Growth fund, which has moved from a small short of 1.4% to a long of 3.3%. Hardly a massive cash position, but the Citywire A-rated managers Timothy Wahl and Jed Cohen are second among the 70 managers in the peer group over the past decade on a risk-adjusted basis and have a positive information ratio over all time periods from three months through to 10 years. It’s worth paying attention, then.
The average track record of managers in this list is more than 10 years. They were all managing money before the crisis, so perhaps their experience has taught them to take some risk off the table.
While that may be the case, the truth of the matter is that it’s rare for an equity manager not to be fully invested. Fewer than 10 large-cap funds across all styles are holding a cash position of 5% or more. So talk of ‘stretched valuations’ has not jolted portfolio managers to divest just yet.