Over the past few months the dominant trend has been professional stock market participants commenting that the risk level for a correction in equities markets has risen significantly. Portfolios were being repositioned defensively to hedge against a downturn and significant allocations back into cash made. However, it now appears that pessimists have been coaxed back into markets which are still booming, afraid of missing out on returns.
A recent Merrill Lynch survey of global money managers with over £400 billion of assets under management suggests that an average of just 4.4% is currently being held in cash. That’s the lowest level on non-invested capital in over 4 years, with the figure last as low in October 2013. One possible reason why cash allocations have been put back to work is that investors who have entrusted their funds to money managers have been applying pressure on them to not miss out on returns while markets remain in an upwards trajectory. The other is that the money managers themselves have reassessed how likely an impending correction might be.
Money managers who were among the more conservative and started moving into cash earlier than most are now caught between a rock and a hard place. Managers who increased their cash exposure are now in an uncomfortable position. More may be being missed in potential investment returns if the cash had stayed in the market than eventual losses if a correction does come. However, if cash is reinvested shortly ahead of a correction, not only would a chunk of the bull market have been missed out on but the manager could find themselves back in the market just before the losses that a significant drop would result in.
However, some money managers who increased their cash allocation are sticking to their guns. As reported in The Telegraph, Thomas Wilson, manager of F&C’s UK Alpha and UK Mid-cap funds believes that peers who remain fully or close to fully invested have locked themselves into a “certain way to lose money”. His funds are currently holding almost a fifth of all their assets under management in cash.
He explains his stance as:
“It is when others are taking on excess risk that we, as an investor, feel we should be reducing risk. That certainly applies now. While cash has an ‘opportunity cost’ [missing out on returns elsewhere], we believe it does not have the same level of risk as some UK stocks at the moment”.
“The cash that we have in the funds will allow us to take advantage of opportunities when they inevitably occur.”
DIY investors investing online face the same conundrum with market commentators having predicted a new crash for several years now. Hargreaves Lansdown’s Mark Dampier commented:
“I think more money is lost from people trying to predict the correction or fall than is ever made from the fall itself.”
However, he also goes on to say something not dissimilar to Wilson’s position by stating that a rough rule of thumb for more conservative private investors would be to keep a third of assets in stock markets, a third in bonds and a third in cash. The cash can be used to buy equities cheaply if the market does see a significant correction, while also providing a buffer that means equities held don’t need to be cashed in when prices are down, allowing them to recover with the market.