As the equity markets hover near record highs and volatility starts to climb, financial advisers and money managers are increasingly finding comfort in low-yielding cash positions.
“Right now, prices are so high you're not getting nearly as much as you should for the risk you're taking,” said Eric Cinnamond, manager of the $714 million Aston/River Road Independent Value Fund (ARIVX), which currently has a 71% weighting in cash.
“We're not making a market call with our cash position, we're saying we're not getting paid adequately to take the risks,” he added. “The problem is, for our industry, we're so caught up in short-term relative value, as opposed to absolute value.”
Once a controversial symbol of fear or even laziness, big cash positions are becoming almost fashionable, especially when the likes of billionaire investor Warren Buffett admits to parking a record $50 billion in cash.
The chairman and chief executive of Berkshire Hathaway Inc. reported that he is waiting on a “fat pitch,” and that his current cash position is the largest it has been in his more than four decades of investing.
Across the universe of open-end mutual funds, the average cash balance was 8.08% at the end of June, according to Morningstar Inc. That's up from 7.27% at the start of the year, and is now higher than it has been since the end of 2005 when average cash levels spiked to 12.07%.
For Theodore Feight, owner of Creative Financial Design, managing cash exposure has been both a blessing and a curse. Across his client portfolios he has upped cash weightings to between 10% and 20%, which he described as “double or triple our normal levels.”
“In 2011 [when the equity markets suffered a mid-year dip of 21%], I made the mistake of getting out and didn't get back in fast enough,” he said. “And this is starting to look a lot like that again, so we're kind of debating about going back in a little faster this time.”
(See Templeton's Michael Hasenstab discuss how to get ready for rising rates.)
NORMALLY 100% INVESTED
Mr. Feight, who said he is “normally 100% invested,” has adjusted his strategy based on rising geopolitical risks.
“We're really worried about Russia, and that's why we started building up our cash in May,” he said.
Mark Travis, chief executive of Intrepid Capital, makes no apologies for a 25.8% cash weighting in the firm's flagship $465 million Intrepid Capital Fund (ICMBX).
“Typically, when prices are high, our cash tends to be high,” he said. “It's unfortunate that many people assume to outperform the market you must stay fully invested, but that's the preponderance of thinking among the brokerage and financial adviser community.”
Mr. Travis believes that, in addition to providing “dry powder” for new investing, cash also offers a “counter balance” to reduce portfolio volatility.
“I think there needs to be a paradigm shift both among investors and the people giving them advice that you don't need to be 98% invested at any waking moment,” he said. “For starters, I don't think most investors can deal with the volatility of an equity index when it comes to a 50% drawdown.”
Even some money managers who pride themselves with usually staying fully invested are fessing up to a more liberal use of the term “fully invested.”
“We have 7.5% in cash now, and that's on the high side for us,” said Bob Bacarella, manager of the $152 million Monetta Young Investor Fund (MYIFX).
“I used to think cash was a good defensive move, but it really isn't,” he added. “Cash will cushion some of the blow, but it's temporary and markets tend to come back quickly from sharp declines, so now you're going to lose on the upside.”
