But contrarian Tim saw this as an opportunity to add more dollars to some of his clients’ portfolios. “I believe there is still 10% upside in the dollar, so that would give me an additional 2% return assuming 20% of the portfolio is invested in dollars.”
When it comes to investment grade bonds, no such return appears attainable. “Sometimes clients complain the cash is just sitting there,” says Peeters. “In such a case, we invest some of it in short-duration dollar corporate bond ETFs, which yield about 1.5% with an average duration of 2.5 years.”
Active bond managers have a serious problem at the moment, because alpha opportunities are too few to make up for the fees they charge, Peeters believes. “A lot of fixed income funds charge fees that are higher than the average yield to maturity of the funds themselves. This is a very important issue, especially for retail investors who buy retail shares classes, and it drives them into cash [and ETFs].”
Scrooge in fashion
The active bond funds Peeters is still invested in, need to have the flexibility to allocate to cash significantly. “We don’t buy funds which can’t gointo cash. The manager should have this possibility,” he says.
Many bond managers have indeedbeen upping their cash weightings significantly in recent months.“ Liquidity in our funds is particularly high,” says Lewis Aubrey-Johnson, head of fixed income products at asset manager Invesco. “If you sum cash and very short-duration bonds, which is almost the same as cash on deposit, our bond funds have liquidity levels between 15% and 20%.” He admits that “it’s not great holding a lot of cash” as it is a loss-generating investment, at least for cash held in euros, adding: “The custodian charges us to hold cash, although the charge is minimal.”