Monday's FT fund manger supplement section ran an article on the levels of cash fund managers are currently carrying in their portfolios. We have often highlighted how the Merrill Lynch fund manager survey continues to show cash levels remain high relative to history, as a percentage of the overall portfolio. When one hears anecdotal evidence of large portfolio weightings in cash, it is generally considered a bullish sign for equities as it suggests a latent demand. Bucking the central banks for the past few years has been a painful experience for money managers running high cash levels, fearing the legacy issues arising from 2007.
Two fund managers were quoted in the article, JP Morgan and Schroder's, as having 28% and 37% of their respective portfolios in cash. We are reminded of the fund management house of Phillips and Drew under the leadership of the late Tony Dye deciding equity valuations were stretched in the 1990’s, and reduced equity weightings accordingly, they were eventually proved right but the timing was so poor it cost many years of performance.
Another example of how getting the call right but the timing wrong, in the 1970’s Rothschild's correctly predicted the 1974 market crash but with such high levels of liquidity found it difficult getting the money back into the market when it turned. If fund managers are in a herd preparing for a stock market correction, which is bound to come as they always do, the unforeseen problem will be the timing of when to invest back in again. The pent up demand will cause liquidity issues, who will want to sell on the way up? Under these circumstances the recovery in shares prices can be as rapid as the selloff.
The long-term trend is for stock markets to rise, market timing is always the hardest thing to gauge as many a portfolio manager will tell you, but that apparently does not stop them trying their hand at it.
One such event that could possibly bring some short-term volatility is the tonight's FOMC meeting. The macro data has softened in the first few months of 2015; pushing out expectations, possibly later than September for the first rate rise. Should the Federal Reserve keep their dovish tone from the last meeting, however at the same time put investors on notice that they may look to move at anytime in the coming months, this could create a wave of uncertainty.