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Why does my fund manager hold cash?

Joanna Faith
Written By:
Joanna Faith

Fund manager cash positions are at a five-month high. What does this mean for your portfolio?

According to the BofA Merrill Lynch Fund Manager Survey for May, overweight cash positions have risen sharply, to a net 23% – the survey’s highest since December 2014.

This news may leave some investors surprised or even frustrated.

Managers are paid to invest in companies for clients, whatever the market conditions, and not to sit on the side-lines in huge amounts of cash.

If investors wanted to hold some of their portfolio in cash, they could do so easily themselves, without incurring fund manager charges.

However, there are perfectly reasonable explanations for a manager to have a high cash position – most of which shouldn’t alarm investors.

Illiquidity is arguably the most common motive for a manager to hold cash. Take managers who run property funds, for example. By their very nature, these products are highly illiquid – buying or selling property can take months, and can make it difficult to sell holdings in the fund quickly. Property fund managers hold cash to satisfy demand for redemptions and for building up enough money for new investments.

Adrian Lowcock, head of investing at AXA Self Investor, says it is not uncommon for property funds to hold 15%-30% in cash, compared to the average 5%-6% in equity funds.

Managers also use cash to manage risk. Managers who invest in smaller companies, for example, may decide to build up an investment position over a certain period of time, which could account for higher cash positions. Cash could also be held as collateral against a position in a derivative.

Alternatively, if a fund is performing well, it could experience a spike in inflows which could account for a high cash position. The manager will hold onto the cash until he or she decides what to buy next. The manager could also have sold a number of shares and be in the process of buying some more.

Other reasons include a change in fund manager or a change in style from mid-cap to small caps, for example.

Of course, there are times when a large cash holding could be more worrying. Has the manager run out of ideas perhaps?

Lowcock says the key thing is for investors to keep an eye out for any substantial changes in managers’ cash holdings: “If the manager has always been 100% invested and then moves to a significant position, then that might be the time to ask questions.”

Ben Yearsley of Charles Stanley Direct views holding cash as part of the process of actively managing a portfolio.

“Investors shouldn’t make any rash or hasty decisions. If markets fall, it may be an active decision to hold cash,” he says.

There are strict rules governing the amount of cash fund managers can hold.

The important thing is whether the manager is open about their cash holdings and the investor understands why there is a cash holding in the first place.