As many economists predict the end of what has been poised to be the longest bull market on record, some fund managers’ cash holdings reflect they’re a little spooked by what’s to come – could this mean they predict another global financial crisis?
Data from FE Analytics shows some big fund managers have upped their cash allocations, with Schroders, Platinum, Pengana, Magellan and Hyperion all increasing cash by at least ten per cent between 31 August 2017 and 31 August 2018.
And, while this normally foreshadows some kind of market crash, portfolio managers don’t exactly foresee the next financial apocalypse, just some upcoming market corrections.
The Hyperion Global Growth Companies fund has increased its cash allocation from six per cent last year to around 16 per cent in August this year.
Chief investment officer, Jason Orthman, said Hyperion believed the reflation trade over the past 18 months would moderate, hence it is holding slightly elevated cash levels in the case of any market or stock-specific corrections.
“We believe the returns of global and domestic benchmarks will be low over the next five years with structural macro headwinds such as high debt levels, an ageing population, automation of the workforce, environmental disruption and rising wealth inequality,” he said.
“However, we have a portfolio of global stocks that should trend higher over the next five years.”
Orthman said the stocks were unusual in the sense they have strong structural growth (annual high teen earnings per share growth) from taking market shares in large addressable markets.
Magellan’s High Conviction fund almost doubled its cash holdings from eight to 10 per cent last year to between 18 and 20 per cent this year, and Schroder’s QEP Emerging Markets Wholesale fund similarly jumping from 5 per cent to 15 per cent as of June this year.
Magellan’s Chris Weldon said we were in unchartered waters, and he told Money Management that the fund’s higher cash allocation through 2018 reflected the fund manager’s cautious outlook.
He said large central banks were removing an unprecedented amount of liquidity and support from the global financial system and the US administration has added a heavy dose of stimulus to an economy near full employment.
“Both of these developments increase the probability of a disruptive rise in long-term interest rates. And all of this is occurring in the context of elevated equity market prices,” he said. “Due to this confluence of events our view is that the probabilities of a market correction have increased.”
Weldon said he was mindful that downside risks had increased to an elevated level, and protecting client capital was of utmost importance.
Pengana’s International fund increased its cash holdings from 11 per cent to between 20 and 25 per cent this year, while Platinum’s Global fund has been slowly increasing its cash holdings since March this year.
Schroders, Pengana and Platinum were unable to provide comment on their increased cash holdings, but general consensus across the major fund managers suggests global equity assets will face headwinds.
The chart below tracks the performance of the five funds for the year to 31 August 2018.
