Mr. Montier called cash “a severely underappreciated tail-risk hedge,” which — in the hands of skilled managers — offers the most organic solution to the thorny issue of when investors should add such protection and at what cost.
Timing is the biggest issue in tail-risk protection, with permanent allocations likely to do more harm than good, he wrote, concluding “a long-term value-based approach ... coupled with a broad mandate (allowing money managers to add cash in overvalued markets) seems to offer the best hope.”
In an interview, Mr. Montier admitted he's a skeptic when it comes to this “topic du jour.” He argues that greed, more than fear, is driving the current surge of interest in tail-risk protection: investors want to keep reaching for returns even in markets where returns are increasingly tough to come by, “when they really should stop ... (and) hold cash as a safe place to be, until things look more attractive,” he said.
Providers of costly tail-risk strategies have an interest in enabling such risk-taking, he noted. The fact that “you can't charge very much” for a cash-focused tail-risk strategy could be one reason it remains an underrated option in investors' arsenal, he added.
Mr. Montier conceded it would take a “pretty radical departure” from the prevailing asset-liability model used by institutional investors to promote cash as a tail-risk strategy. A majority of investors continue to set a strategic asset allocation benchmark and then spend the bulk of their time worrying about manager selection — a questionable ordering of priorities, he argued.
Still, the question of allowing managers to add cash, rather than force them to buy into overextended markets, is getting a lot of interest lately.
Money managers who look to add value for clients by moving into cash when they can't find attractive investments say they're likewise seeing more tolerance now for that strategy among institutional investors.
“In the old days, if you told a consultant you need the flexibility to have more than 5% or 10% cash, very often they would say, "well, I can't include you in this search,' ” said John Arnhold, chairman and CEO of First Eagle Investment Management, New York. “That isn't happening as much” any more, he said.