In our view, despite the recent jawboning by Trump et al. in his administration that all is 'ok' with the US and its economy, last night’s rate cut was quite a concerning development to us.

On the positive side, lower interest rates of 0.5% in the US, and 0.25% here in Australia, are a big tick going forward for 'relative' equity valuations vs. bonds - one only needs to look back over the last 10 years of interest rate cuts and the impact that has had on earnings multiples and share prices to see the positive relationship. In saying that, interest rates are only one part of the equation and company earnings are the other. We need both to be working together to produce higher equity markets and returns.

That equation feels unbalanced here.

What we are concerned with is the fact that last nights rate cut was the FIRST between meetings. The first 'emergency' action since the GFC. It's probably worth us saying that again... last night was the FIRST cut between meetings since the GFC. To us, that's a very important message and something that cannot be ignored.

If actions speak louder than words, in our view, central banks are telling us to be concerned about the economic impact of COVID-19 and are attempting to 'stimulate' their way out of it. This has of course been the go-to policy response over the last decade and it has done wonders for papering over issues and creating higher asset prices and hence confidence. But we do wonder; if borders are shutting, travel is being cancelled or postponed, factory workers can't get to work due to movement restrictions, millions of people are quarantined in their homes and schools are being closed, how will a rate cut help here?

Arguably, it won't and can't.

What is becoming clearer by the day is that the economy will be impacted. And if the economy is going to be impacted, then company earnings will also be impacted - and that's the big unknown, by how much and for how long? Earnings are a key input for valuations and if they go down, so do share prices and hence the stock market.

There has been a lot of posturing by a lot of commentators on this subject but quite frankly, everyone appears to be guessing. The data we have at the moment is patchy at best, incomplete at worst, and simply does not lend itself as a stable base to accurately make future forecasts - which is why we have such wide-ranging forecasts and opinions.

Hence, in such an uncertain environment with so many possible outcomes, we don't think there is a rush to put money to work here. Despite the markets initial reaction, those hoping for a V-Shaped recovery like SARS in 2003 (yes I am getting old!) might be sorely disappointed.

Given COVID-19s wide-reaching impacts on all G7 economies (some might say unprecedented in our generation), markets will struggle to 'bounce' higher from here and indeed we could be looking at the end of this mature bull market for some time until the global economy gets through this.

With 90 per cent of our fund now in cash, we do realise that we are attempting to 'time the market', something that has proven over time to detract value from investment portfolios. But we feel its prudent right now given the risks in our view are unfortunately stacked to the downside and the Fed rate cut last night was not the positive development we were hoping for. If anything, it has made us even more cautious.

Fear and uncertainty are driving the market, that we know for sure. But it will only be once we have reliable data points to analyse, and which allow people to start forecasting more-accurately again, that will be the point in our view to warrant considering a higher equity allocation in quality businesses with good growth prospects.

Asia and the world recovered from SARS with no lasting damage and we are sure to do the same post-COVID-19 here. This is likely to be a temporary issue, not a structural one, but it's prudent for us right now to stay conservatively positioned until peak newsflow is behind us and the data is available to make more accurate and informed decisions, instead of guessing.

So... thats what we are doing. 

Michael Whelan

Russell - presumably your fees will be adjusted when you 'outperform' the index for taking hardly any risk (10%). Might as well run a 'cash' fund.

Russell Muldoon

By being flexible and having a mandate to go to cash for protection, we've saved over 10% of investible assets since Monday last week. We don't know how long or deep this correction will last, but that's a lot firepower to go back to work later. That's over 10 years of fees by the way. We've also returned close to 60% since the fund started in September 2017. What more could one ask for!

Marcus Padley

Russell we went to 100% cash in September last year when the market looked like trade negotiations were going to collapse...we got it wrong...two days later it turned into a trade "Love Fest". We rapidly reinvested taking some underperformance for a while - but no losses (obviously). Our fund has grown significantly since then because people saw a fund manager that (1) can go to cash if they think it appropriate (almost no fund managers can - they don't have the mandate) and (2) has the balls to do it. We run money as if it is our own (and some of it is). I would personally cash out sometimes if it was all my own, so why wouldn't we cash out our clients as well? Because you might be criticised for getting an outperformance fee for saving your clients from potentially precipitous losses? I don't care about that. I care about the money, not losing it as well as making it. Respect to you.

Damien Klassen

+ 1 to Marcus's comments. We went to cash & bonds (within mandates) at the end of January and spent 4 weeks explaining to clients that even though markets kept rising the risks were real. I understand Michael's comment that clients want equity exposure and don't like the thought of paying fees to sit in cash - we have that conversation every second day. Especially with superannuation clients. But as an investment manager to go to cash is a big career/reputation risk. If you only paid your investment manager when they were invested in equities then (surprise!) they would stay invested all the time. To the detriment of client capital.

Damend Naidu

But arent there numerous studies showing that trying to time the markets doesnt get you any better returns than the index ?

Patrick Poke

Great discussion here everyone, fascinating to read!

Marcus James

Not sure what to make of all this. On the same page I can see Coppo and Buffet saying it’s a good time to buy, while Padley and Muldoon are saying put it into cash! When in doubt - buy toilet paper.

Justin Baiocchi

There is an argument that if your job is running an equities fund, then that is what you should do - make tactical investment decisions within the equities sector. Let your investors look after their strategic asset allocation (yes, perhaps by withdrawing their funds from your fund and sticking it in the bank, if that is what they wish). By making strategic asset allocation decisions within an equities fund it can be said that you are forcing your strategic asset allocation views on your investors, who initially (presumably) invested in your fund for equities exposure.


Sounds a lot like trying to time the markets, which is a fraught exercise at the best of times.

Jeff Wecker

I dont see these actions as trying to time the market, but protecting Capital. I did Just that at the beginning of Feb by putting my industry super into Cash. I am happy to wait another month or so at which time I think we will have a better idea of what the market and world is doing and can then invest in the recovery. Better that than being 20% down on my capital! Great discussion - and good on your Russell. I just want to point out that my Industry fund has been known to say that people shouldn't move their money around within the fund like I have done - surely that sort of statement is not "in the best interested of members".

Timothy Cole

...or as Seth Klarman said, "you don't pay me to hold cash, you pay me when to hold cash" Also another of the great US fundies also said something like "I liquidate the fund every now and then, this makes me ask the question "do I really want to own it"

Graham Wright

Lose 25% of your capital and you need a 33.3% gain just to recover loss. A 50% loss requires a gain of 100% to recover. Cash in bank reduces losses and is available to buy cheaper shares in the future. Can't time the market accurately but a shorter mistiming is better than a bigger mistiming. Holding now for the turnaround at the bottom of the market ensures you are timing the rise from the bottom accurately but could be a rather costly mistiming. Congrats to Russell and your supporters.

bruce johnston

Don't shorts play a role here,be it options or ETF rather than all cash.


Taking some money off the table and being conservative is fine, but taking extreme measures like liquidating a vast majority of your portfolio, especially when you know this issue will blow over within a reasonable timeframe (as stated in the article), doesn't sound like a prudent course of action.

Graeme Holbeach

Going to cash to be prudent is easy. Not so knowing when to buy back in. Does one really expect that the data to make more accurate and informed decisions will readily be discernible in x number of months time? Or maybe there will just be another set of problems that have not been given enough (or given too much?) weighting in the past.

Russell Muldoon

Excellent insights into your investment management styles everyone - and your collective thoughts, thank you. Some great discussion here. Our fund is currently family, friends and a few outside investors who are aligned to what we do - so everyone is onboard with how we manage risk. We think that is the most important part of funds management to get right - you can never please everyone, and after 20 years, Ive given up trying. There are more products out there then there are listed stocks! So theres no shortage of investment styles to choose from. The way we see it... Its easy to come back from a 10% drawdown as you only need to make back 11% to break even. Push that to a 50% drawdown, and you have to make back 100% - maths really starts to work against you as the numbers get bigger. As I write this, we have saved a > 25% drawdown on our capital, which means we now don't have to make back 33.33% just to get back even. A VERY exciting position to be in. Sometimes there's a bit of luck with going to cash - but the market just felt very unbalanced a few weeks ago. And... here we are having sidestepped this severe correction. Thankfully. The return of our capital is far more important than the return on it (in our view). If we can surround ourselves with investors that think the same, and dont care about this months or next months return figures in an ultra competitive world, then thats what we consider true success. Takes the pressure off completely and allows us to deliver top-quartile performance. We are coming up to our three year track record this year, so the fund will begin to open to external investors in 2020. Fund has returned +59.70% vs. the ASX total return of +11.50%. At the moment, we are 100% allocated to cash assets.

Adam Easter

Recent history shows that was a great move Russ. I love it when a manager shows conviction to protect capital. Well done.