A couple of times now, in recent months, I’ve come across equity fund mangers with surprisingly large amounts of their portfolios sitting in cash. In some cases as much as 10-20% (the maximum allowed).

When tackled on this subject, each has been clear in their explanation. One described his cash holding as a ‘war chest’ – a pot of money he can use quickly and easily should markets fall and stocks he has been contemplating buying become priced more attractively. He can also buy them without having to sell another stock first. The same manager went as far as saying that cash is a very undervalued but powerful asset as it can be used in this way.

Another manager, who has a relatively concentrated portfolio, said that he doesn’t invest for the sake of it – he needs to have a high conviction before he will buy a company. And he wouldn’t add willy-nilly to existing holdings as too high a conviction could be detrimental if proved wrong.

Both made perfect sense with their arguments and,when you couple this with phrases such as ‘winning without losing’ (i.e. doing ok in rising markets but having an added buffer should markets fall) and see performance figures which show lower volatility and better risk-adjusted returns than many of their peers, many people would generally walk away happy. Particularly those previously burned by falling markets.

The other side of the argument, however, is shouldn’t an investor expect their equity fund to be fully (or almost fully) invested and working for them? After all, if they want to hold some of their portfolio in cash, they can do so very easily themselves. And isn’t a fund manager being paid to invest your money into the equity market for you – to find those ideas they say you can’t possibly find yourself? If you have put your hard-earned £11,280 ISA into a fund, do you really want £225 sitting in cash?

The answer is probably that in an ideal world, most people would like to think that their equity investment is exactly that. Money invested in companies, not cash.

However, we don’t live in an ideal world and, if the fund continues to perform well, does the average person really mind if some of the money is left uninvested? Probably not. Particularly if markets do fall. None of us like seeing the value of our investments fall.

The important thing is that fund managers are firstly open about their cash holdings, and secondly, that an investor understands why there is a cash holding, how it will be used and, crucially, is happy that this is the case. It’s a question we ask fund managers when we meet them and is particularly relevant in either strongly rising, or falling, markets.