UK equity funds hold a greater proportion of their assets in cash today compared with a year ago.
Rather than buying the dip in share prices this year, professional investors have been increasing their cash balances.
According to financial data firm Morningstar, 170 out of 225 (75%) UK equity funds* increased their cash position from October 2021 to September 2022, suggesting that professional money managers have been retreating to cash as markets fall rather than deploying cash balances to buy shares at cheaper prices.
The average cash balance today is 3.54% compared with 2.19% 11 months ago, a 61% increase. This shows fund managers are “selling the dip” rather than “buying the dip”, which could prove to be a poor long-term decision if shares recover, but a shrewd move if markets fall even lower.
In an ideal world, cash balances are built up when shares are rising and deployed when markets fall. But holding on to cash in rising markets means investors could lag their peers, so fund managers often do the opposite.
Deploying cash when shares fall also presents a challenge for portfolio managers, as being more fully invested than rivals could lead to worse performance when markets are falling.
Professional investors are judged against their peer group as well as a basket of stocks, known as a benchmark, which reflects their investment universe.
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Many funds have seen withdrawals over the past 12 months as markets have fallen, so raising cash balances is a sensible thing for fund managers so that they can easily meet redemption requests without being forced sellers of stocks. This is particularly important for investors in smaller companies, which can be tricker to buy and sell on demand.
The Investment Association (IA), a trade body for the funds industry, calculates there were net outflows from funds available to UK investors in eight of the first nine months of the year.
The behaviour from UK equity managers is not unique, with Bank of America's fund manager surveys of professional investors showing that cash balances are at a 20-year high.
On average, cash positions were 6.2% in November, slightly down from 6.3% in September and the highest since April 2001. The long-run average is 4.9%, according to Bank of America.
Big increases in cash balances from October 2021 to September 2021 for UK funds include: Premier Miton UK Value Opportunities (1.75% to 8.71%); Schroder UK Multi-Cap Income (1.08% to 7.29%); Jupiter Income Trust (3.05% to 8.14%); and Liontrust UK Growth (2.48% to 6.83%).
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Funds deploying cash from October 2021 to September 2022 include: TM CRUX UK Special Situations (7.18% to 1.52%); Artemis UK Smaller Companies (4.07% to 0.6%); and CFP SDL UK Buffettology General Income (7.81% to 1.52%).
Cash allocations naturally rise as markets fall because the value of a portfolio in shares will decline but the cash amount will stay the same. However, the 61% increase in cash over a year compared with a 9.3% drop for the typical UK all companies equity fund, suggests that fund managers have raised more cash this year.
Holding cash right now may turn out to be the right decision. Fund group Fidelity International’s multi-asset research team are still cautious about the stock market and say that “cash is king”.
It said: “The headwinds that have been engulfing the global economy for the last few months are yet to abate and in many cases are getting worse. Europe and the UK are in the midst of an energy crisis. Global central banks are slamming the brakes on to rein in high inflation. Consumer confidence is at rock bottom. China’s economy remains stuck in first gear.
“The deteriorating macro outlook is not yet reflected in earnings forecasts or valuations, implying there could be further downside to risk assets. As a result, we have a max overweight position to cash and are underweight equities and credit.”
*Funds in the Investment Association UK Equity Income, UK Equity and UK Smaller Companies sectors, with more than £50 million in assets, excluding index funds, as of 1 November 2022.
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