Market Commentaries

  • Fund Managers Hold More Cash in August. But What Does That Mean?


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    Sources: Rates Data —Bloomberg Markets as of 8/11/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 8/11/14


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    Fund Managers Hold More Cash in August. But What Does That Mean?

    Bank of America/ Merrill Lynch recently conducted a survey that looked into what percentage of Fund Managers are currently “overweight” cash in their portfolios. The results show that 27% of respondents consider themselves overweight cash, up from only 12% in July. There are a few interesting takeaways from this article but before we dive in, it’s important to understand what “overweight” cash really means. Consider this, many money managers keep a certain amount of their portfolios in cash to help with trade settlement and client fees. This allows them to draw upon the cash rather than place trades to generate liquidity. So, if a money manager aims to keep say 2% in cash, holding 4% would be considered a large overweight position (a relative increase of 100%.)

    A few different media outlets have reported on this survey and most of the headlines have been something to the effect of “Pro Investors Hold Most Cash since 2012.” While on the surface this headline is sure to rattle some investors’ confidence, it’s important to take a step back and keep a proper prospective. The actual survey reported that the average cash position is about 5%. While it is true that this is the highest amount since June 2012, it means that 95% of the portfolios may still be invested in equities, bonds, commodities etc. So to say they are “overweight” may be accurate but it certainly doesn’t mean they are moving 100% of their portfolios to cash in an attempt to time the market. (It should also be mentioned that since 2012, the Stock Market, or S&P 500 has increased a cumulative 54%)

    We, at Hennion & Walsh, believe that timing the market is an inefficient strategy and often refer to the landmark Determinants of Portfolio Performance study conducted in 1991 by Brinson, Singer and Beebower, which, identified asset allocation as being responsible for more than 91% of portfolio performance while market timing accounted for only 2%. Our portfolio strategies utilize diversification to protect capital in volatile markets and if you are considering moving to the sidelines because of the increase in volatility witnessed over the past few weeks we encourage you to speak with a representative from the Asset Management Team to discuss an alternate to moving to cash.


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