Some investors increasing cash in portfolios

Cash is creeping higher in the equity and multiasset portfolios of global money managers.

A number of money managers are holding up to 20% cash in some cases, in portfolios that usually would be holding far less or are fully invested.

“I have heard anecdotally from a number of managers that they are allocating some assets to cash where they have that flexibility,” said Phil Edwards, European director of strategic research at Mercer Ltd. in Bristol, England. “Those allocating a bit more to cash are doing so perhaps in preparation for a correction, or as they may be struggling to find opportunities that are reasonably priced in current market conditions.”

Some equity markets are off to a strong start. The U.K. FTSE 100 returned 4.35% through March 31, vs. -1.16% for the first quarter of 2014, while eurozone quantitative easing has pushed risk assets in the region up. The MSCI Europe index gained 16.76% through March 31, vs. 2.27% for the same period in 2014.

The U.S. is more muted, with the Russell 3000 up 1.8%, vs. 1.97% a year earlier.

The potential for a market correction and the return of volatility are high on the list of factors for moving assets into cash.

Allianz Global Investors officials late last year changed their thinking about the amount of cash managers can hold in portfolios, as a way of enhancing flexibility throughout its strategies.

Lucy Macdonald, an AGI managing director and chief investment officer-global equities, London, said she is holding cash at the “high end of the normal range,” but did not disclose that range.

Currency markets have experienced more volatility than equity markets, besides a few spikes. “But it wouldn't be surprising if we get more volatility in (markets other than currency) throughout this year as the (Federal Reserve) begins raising interest rates,” Ms. Macdonald said.

“Having more cash, more liquidity, at the moment might not be a bad idea. Then being ready to take the opportunity and go into investments when we can. That is how Andreas Utermann (global CIO and co-head of AGI) is thinking. There is the potential for a correction in the equity markets — it is about having some firepower and being brave when the opportunity comes.”

AGI runs €143 billion ($154.69 billion) in equities globally, and Ms. Macdonald manages the £3.1 billion ($4.6 billion) Allianz Global High Equity Alpha strategy.

Executives at fiduciary manager P-Solve LLC, part of River & Mercantile Group PLC, also have seen a move within the single-asset strategies of the underlying managers within P-Solve's portfolios. Tamsin Evans, London-based managing director, multiasset, said she likes managers to be fully invested, but is happy for cash holdings of up to 5% of assets to be used for “opportunistic purchases. We are seeing that at the moment — even managers that would usually be 100% invested are maybe 95% invested at the moment.”

Within P-Solve's fiduciary management strategies, about 80% is held in risk assets such as equities, with the remainder in sovereign bonds, cash and gilts. Cash is at 2%. Underlying managers add a further 2.5%. “That is probably the highest we have ever seen it. Equity managers are holding small cash positions in this case,” Ms. Evans said. Part of that is being more defensive in the short term, waiting for opportunities to arise, she said. P-Solve runs £6.9 billion in fiduciary management assets.

Another issue is whether there is anywhere better to invest within equities and other asset classes.

Alexis Mathieu, manager of the SWMC Emerging European fund at $2 billion boutique money manager S. W. Mitchell Capital LLP, London, is holding about 20% in cash right now. He was 90% to 92% invested through the second half of 2014.

“We remain cautious and would like to keep cash as a cushion and await the right opportunities to deploy it,” Mr. Mathieu said. Short-term political uncertainty is holding him back from increasing exposure.

For multiasset strategies, cash is the place to be as an alternative to other assets.

“Cash today for me is a good idea for a number of reasons,” said David Vickers, London-based senior portfolio manager, Russell Investments, which has $275.1 billion under management. “The cost of carry is relatively low. Cash rates in Europe may be low and even negative, but looking at the opportunity sets that exist elsewhere, our return expectations are pretty low.”

Within the portfolios Mr. Vickers runs, including the firm's flagship $2.2 billion Multi-Asset Growth Strategy, “we have approximately 8% cash. As the opportunity cost of holding cash is very low, it provides wonderful optionality.” He said that, early in the market cycle when return expectations are high, the cash holdings typically would be close to zero. However, that depends on markets and opportunities.

The current level could increase. “I cannot help thinking that we are six or seven years into a bull market. We are still in an environment of monetary experimentation, secularly low growth, and rates are set to rise,” said Mr. Vickers. “And these are the things that I know about. For me, looking toward preserving wealth and protection gains made at this stage in the cycle makes sense.”

Johanna Kyrklund, head of multiasset investments at Schroder Investment Management Ltd., London, said the firm, which runs £72 billion in multiasset strategies, has been holding “higher cash balances as we've gradually taken profits in credit and emerging debt as well as avoiding commodities.” Executives have maintained equity weightings. She did not disclose the ranges or current weightings.

“All asset prices have been pushed up by (quantitative easing) in recent years, but volatility could pick up as the Fed starts to raise rates.”

Pension fund executives in the U.S., U.K. and Europe who oversee internally managed equity portfolio say they are fully invested, or declined to comment as they do not want to be seen as calling the markets.

“At the investor level, most are reluctant to make tactical shifts of that sort between equities and cash,” said Mercer's Mr. Edwards. “Most pension trustees don't see themselves as able to make calls on the markets.”

A spokesman for APG Asset Management, which has €400 billion in assets under management, including those of the €344 billion Stichting Pensioenfonds ABP, Heerlen, Netherlands, said the manager is fully invested in the equity portfolio, but has a tactical asset allocation policy “as a form of overlay to be able to make use of opportunities.”

Similarly, Norges Bank Investment Management, manager of the 6.6 trillion Norwegian kroner ($820 billion) Government Pension Fund Global, Oslo, is not holding back cash, but has a rebalancing rule that allows the manager to “buy shares after prices have fallen,” said a spokeswoman. “As a long-term owner with no short-term liquidity constraints, we are well positioned to increase risk when others must decrease it.”