Why these funds hold so much cash

Stock markets might have surged on news of a US-Iran ceasefire but investors had very few places to hide in the sell-off that accompanied the conflict.  

Equity markets tanked, while classic safe havens like gold and bonds ultimately joined them on the way down. 

Such an environment, reminiscent of what we saw in 2022, reminds us of the value of cash. 

It’s one asset that can definitely avoid the wrath of a sell-off and gives investors dry powder to deploy into cheaper markets. 

Professional investors can also make use of cash. The March instalment of Bank of America’s Global Fund Manager Survey showed that respondents had hiked cash levels from 3.4% to 4.3% as more bearish sentiment set in. 

Meanwhile a few of the equity funds available to UK investors have run pretty high cash levels as of late. That could potentially prove useful in volatile times – and their reasoning tells us a little about how to consider markets. 

The funds with big cash piles 

Many of the big active funds have been pretty heavily invested in recent times, with very little in cash.  

Recent disclosures show that Scottish Mortgage Ord (LSE:SMT) had just 0.2% in net liquid assets at the end of February (and ahead of the March sell-off), while Fundsmith Equity I Acc (B41YBW7) had 0.7% at the end of March.  

It’s worth noting, however, that some funds can have chunkier levels of cash – something that can be useful in a sell-off but does potentially mean missing on equity gains in the good times.  

We have trawled fund factsheets to identify names with stated cash levels of 7% or higher at the end of February. 

The funds playing a defensive game

These figures provide a snapshot in time, and it’s worth noting that cash disclosures should sometimes be taken with a pinch of salt, for reasons we discuss later. 

But a couple of funds in our list have very deliberately been running higher cash. 

First up is Global Opportunities, whose stated allocation to cash (and equivalent assets) comes to a whopping 42.8%.

With a market capitalisation of just £122 million it’s a relative minnow and not the best-known name. But its approach has been pretty distinctive in recent years. 

Alan Bartlett, one of the portfolio managers on the trust, points to the fact that the team is trying to limit the fund’s losses if and when a bear market arrives, and that some more defensive investments, such as large-cap shares, have looked expensive and therefore less useful as potential diversifiers. 

“We want to have at most 20% participation in a bear market,” he says. “If the market goes down 25% and we’ve gone down more than 5%, we haven’t done our job right. 

“We’re structuring the portfolio with a downside risk tolerance that is pretty low. We can’t have more invested in the stock market without breaching that. 

“We could deploy more capital into larger, more liquid, ‘safe’ names. That’s what we had in 2022 but the problem is those large-cap, resilient companies have gotten really expensive.” 

It’s worth noting that the team has put some money to work in recent times – including selling down some positions in defence shares and buying into companies battered in this year’s software sell-off.  

Bartlett meanwhile says he is “frustrated by the dialogue around cash”, arguing that it can in fact be used productively. 

“I think cash can be used in a more offensive way in a portfolio,” he says. “In 2022 we made a double-digit return from cash because we held it in currencies that went up.”

The trust’s approach may therefore stand out for bearish investors, though its shares have certainly lagged broader markets over recent years. Some investors may also still take issue with paying for a fund that sits in so much cash. 

Another name in our list, Fidelity Global Dividend, has cropped up in the table thanks to recent trading activity. 

As portfolio managers Dan Roberts and Tristan Purcell put it: “Against a backdrop of strongly rising markets prior to the outbreak of the Middle East conflict, we sold out or reduced a number of our holdings, primarily driven by our valuation discipline.  

“We do not automatically reinvest the proceeds of sales across existing holdings. This allows us to maintain chosen stock position sizes. Rather, we gradually deploy cash over time as opportunities arise in new and existing positions with an attractive risk reward.” 

Other reasons for high cash levels 

Some very different names appear in our list. There’s emerging markets trust Mobius, which did not respond to a request for comment but has previously appeared to have high cash levels.

The fund’s literature appears to provide some explanation, noting that its aim is “to be fully invested while ensuring patient purchases and sales”, something that can lead to temporarily high cash levels. 

Meanwhile open-ended funds can sometimes end up with high cash levels thanks to investor inflows, and that, combined with some bearishness, explains partly why the value fund Lightman European enters the table.  

“The rationale behind the higher level of cash in the fund has simply been a combination of inflows into the fund and caution over markets given all that is currently going on,” the firm said. 

Meanwhile open-ended funds invested in areas such as smaller companies can run high cash levels to account for the relative illiquidity of their holdings. 

Liontrust UK Micro Cap sits in the table, and Liontrust notes that the fund aims to have between 5% and 10% of uninvested cash to “enable flexibility both in servicing potential redemptions and providing capital to take advantage of investment opportunities”. While Premier Miton UK Smaller Companies did not provide a statement, its literature also points to a chunky cash pile as of late. 

Small-cap funds can also end up having high cash levels simply because their holdings get swallowed up in mergers and acquisitions. 

A pinch of salt? 

A disclosed cash position is just one datapoint, and it’s worth perusing fund commentary to see if an investment team has taken an especially bearish view. 

Investors should also remember that cash disclosures can sometimes be confusing, if not misleading. 

Note, for example, that JPM Europe Dynamic (ex-UK) C Net Acc (B845HL6) disclosed a cash level of 8.1% in its factsheet for the end of February. We understand that this figure is inaccurate, and that the true cash position at the time came to just 1% or so.