Even former ‘bond king’ Bill Gross admitted recently that ‘near cash’investments now are the best optionfor bond investors from a risk/return point of view. With the VIX Index now at its highest level since 2011 and equity markets on a rollercoaster ride, it seems a bit of a gamble to increase your equity allocation.
So should you throw in the towel for now and go into cash? Well, that’s what many investors have been doing over the summer, with the China-triggered correction giving the move to cash even greater momentum. According to data collected by BofA Merrill Lynch, global investors poured $22bn (€19.7bn) into cash in the last week of August alone.
Tim Peeters (pictured right), head of securities portfolios at multi-family office Portolani in Belgium, is one of these investors who favour cash right now. “Being able to allocate significantly to cash is important, as it gives you the opportunity to step back in at the right moment,” he says.
In volatile times like these, it sounds sensible to have some cash at hand to put at work quickly if opportunities arise. Optimix, a wealth management company from the Netherlands with a top-down approach to investing, did exactly this. On Friday 21 August – just one working day before fear about China started to unsettle markets – the company announced it had cut its allocation to equities by half to just 26% of the total portfolio over fears the problems in China would spill over to other markets. Most of this was put in cash, so it could be redeployed quickly. “On Black Monday we started to slowly increase our positions againto 40% now,” says Jaap Bouma, a senior portfolio manager at the company.
Patience is a virtue
While cash is a useful investment instrument when equity markets are volatile, Peeters mainly regards it as a supplement to his bond portfolio. He believes it is clever to sit on the sidelines, until the Fed raises rates and yields go up. Even if that takes another year, he thinks it is worth the wait.
“If, for example, you buy a seven-year bond now with a yield of 1%, you will have a total return of just 7%,” he says. “If you wait until interest rates get up to 2% and buy the same bond,you will get a total return of 12% in six years. By staying in cash for now, you also avoid liquidity and volatility risk.”
Peeters prefers to take on some exchange-rate risk instead. The bulk of his cash allocation, which is close to 20% for most of his clients’ portfolios, is invested in dollars. He took an unexpected hit in the last week of August when the dollar fell almost 5% against the euro amid the China market rout.