Cash has become a dirty four-letter word in finance, but value manager Robert Rodriguez says there is a place for short-term liquidity in today's market.
"The likelihood is that if stocks, in general, return 5% to 7% and short-term liquidity returns 4% to 5%, then the penalty for holding liquidity will be considerably less versus what has occurred over the last 10 to 15 years," he said.
Mr. Rodriguez is chief investment officer of First Pacific Advisors, Los Angeles, which was put on watch in December by the $16.8 billion State of Connecticut Trust Fund because the firm was holding nearly 30% of its $188 million domestic equity mandate in cash.
Mr. Rodriguez manages $102 million of the Connecticut portfolio; a colleague manages the remainder. With liquidity averaging 20% to 25% for the year, Mr. Rodriguez said his portfolio typically was 400 basis points ahead of the Russell 2500 benchmark.
"In the last 10 to 15 years, by holding short-term liquidity, we would have given up 700 to 1,100 basis points in relative performance," he said.
"If the stock market were to erode, some high-growth funds would come into redemption.
"But being high in cash is a reflection of the lack of attractive investment opportunities -- and taking that position is exactly what a value manager should be doing."
