Cash and other defensive assets are creeping up in some multiasset credit and fixed-income portfolios, as money managers look to keep dry powder available and opportunities appear scant.
A number of multiasset credit managers said they have increased cash and other short-dated instruments in their portfolios, noting they do not see a favorable risk/reward trade-off in credit markets right now.
Some have reduced risk because they think opportunities will appear in the coming months and want to hold dry powder in their portfolios, ready to invest as the chance arises.
Richard Ryan, London-based senior fund manager at M&G Investments, said in the current investment environment “where you don't get paid to take extra risk, we don't want to. This is a moment in time we need to display Herculean patience, sit on our hands, (and) think about risk in portfolios.”
The firm's £4.4 billion ($5.7 billion) multiasset credit strategy for institutional investors has a 41.7% allocation to defensive assets, covering cash, liquidity funds, U.S. Treasury bills, short-dated government bonds, AAA asset-backed securities, AAA floating-rate RMB, and AAA quasi- and foreign government bonds. As of March 31, 2016, defensive assets made up 15.3% of the strategy.
David Lloyd, London-based head of institutional portfolio management at the firm, added executives have derisked significantly. “We are happy to sit and wait. ... We can only take advantage of those opportunities when we have ample dry powder. It is reloading the gun for the next opportunity,” and it can be thought of as a “war chest.”
“If we are not seeing the appropriate level of reward for risk, we take it off the table and park it,” said Mr. Lloyd.