Still holding cash? How the pros deploy and how you can too

It’s a fact of markets that the best individual days most often come in the immediate aftermath of a crash.

And with historical data suggesting simply missing the best 10 days over the last 30 years would halve your overall returns, sitting on the sidelines risks leaving a lot of money on the table.

On the other hand, not having cash on hand means you could miss out on buying cheaper if markets take a turn for the worse.

To complicate things further, the uncertainty remaining in markets makes it especially hard to know which way we go next.

Legendary fund manager Mark Mobius declared that cash remained king on Bloomberg only last week, while many fund managers have announced they’re now fully invested once more.

So whether you’re chasing growth or income, how should you be handling cash right now?

We asked the experts.

Patience is a virtue

On the growth side of things, Auscap Asset Management’s deputy portfolio manager Will Mumford says deploying cash is a matter of waiting for the right opportunity.

At the end of March, Auscap’s Auscap High Conviction Australian Equities Fund had elevated cash holdings and that gave them the chance to pounce when the market sold off in April.

While their cash level still remains above its long-term average, Mumford says the ongoing volatility means they’re actively “on the lookout” for opportunities to deploy more cash.

“We’re happy to be patient.”

“Future moves in our cash balance will ultimately be a function of the attractiveness of the opportunity set in front of us.”

“We would look to add to a business we like when its valuation is looking attractive or when we think the market is overestimating the risks or under-appreciating potential positive developments.”

The same logic applies in the opposite direction, as had been the case for Auscap recently.

“If the valuation of a company is rich and we think the market is too complacent regarding emerging risks to the outlook, we might look to reduce our exposure a little,” says Mumford.

“In recent months, we’d found that the valuations of some of the ASX’s high quality growth companies had become quite extended, at the same time as earnings risks have emerged, and that has led us to reduce the size of some of these positions.”

Cash is a weapon

For Aaron Binsted, portfolio manager at Lazard Asset Management, cash plays a few key roles.

While Lazard portfolios are generally fully invested, its Lazard Defensive Australian Equity Fund fund has averaged a cash holding in the mid-teens over the long-term.

Designed for investors either in retirement or nearing retirement, this fund is an equally-weighted portfolio of stocks that should offer positive returns as well as a yield above the prevailing RBA cash rate that is sustainable long-term.

If the opportunities aren’t there, Lazard is more than happy to sit in cash.

“It's really about adding another component to the portfolio - limiting volatility, adding yield.”

It’s a strategy that has held the fund in good stead over the last 12 years.

In January 2020, the portfolio was sitting on around 35% cash, which offered a substantial level of protection in the Covid-led carnage that unfolded over the next few months.

But that wasn’t an amazing act of clairvoyance, says Binsted, rather it was because of a lack of opportunities.

“There just simply weren't enough companies that gave us positive capital returns and had long-run sustainable yields that were attractive to us.”

“We're not going to risk losing people's money to chase income."

But that mentality frames one side of their approach to cash. The other side is much more front-footed.

“I really like to frame cash as an offensive weapon. So when you do have sell offs, you've got the advantage to go and buy attractive income streams at good prices.”

This remains the case even if more traditional income opportunities in equities have dried up.

He cites Commonwealth Bank’s (ASX: CBA) forward yield now being below 3%, when historically it offered a premium over term deposits and the cash rate.

If the RBA drops rates as most predict, Binsted says lower-end consumer companies could see their income growth prospects become much more attractive.

So that's how the experts think about cash. Let us know what role it plays in your strategy in the comments below.