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Holding more cash in volatile markets

LiveMint logoLiveMint 29-05-2017 Kayezad E. Adajania

All equity funds hold cash, typically up to 5% of their overall portfolio. There is no official regulatory rule about how much cash an equity fund can hold. Sometimes fund managers also hold cash as market valuations are high and some managers prefer to sell some of their holdings and hold cash till they find better opportunities. We ask the experts if fund managers should hold more cash in volatile markets.

Shyam Sekhar, chief ideator and founder, iThought

Equity fund managers work to a mandate. This usually keeps them fully invested almost all the time. Dynamic asset allocation funds are the exception and provide fund managers the option to keep cash and cash equivalents. But should such linear investing mandates be revisited in the dynamic, volatile investment world that we live in? When volatility goes out of control, it is important for a fund manager to be able to take affirmative actions and avoid being passive. When he doesn’t find anything attractive to buy, he must be able to take conservative investment decisions. Going into cash should be a legitimate option available to him. The belief that portfolios simply outride volatility with the passage of time has not played out well. There is a definite need for affirmative investment actions that could halt potential investment losses in a portfolio. It is time we gave our equity fund managers the option to hold cash subject to a ceiling. Ideally, the ceiling could be at 25% and the fund manager should be made to disclose intent to raise cash by every 5%. This should give investors the choice to take out money if they so wish.

Atul Kumar, head - equity funds, Quantum AMC

At Quantum Asset Management Company, we don’t take decisions to increase or decrease cash just because markets are rising or falling. Cash is a residual of bottom-up investment process.

To explain, as markets are rising many stocks cross our internally-set sell limits. Being disciplined value manager, we go ahead and sell them. There are fewer new buy ideas that get generated. This results in higher cash level, as money from sale transactions can’t be deployed by the fund manager.

To us, cash is never a strategic or tactical decision. Ideally, we would like to be fully invested in the scheme. We would, however, not second guess the research process done by our team and exit stocks if our proprietary numbers suggest so.

It is true that having cash gives us peace of mind when stocks are overvalued. We can use any market correction to pick stocks. However, this may not be possible for a portfolio which has no cash at their disposal. Also, logically it doesn’t make sense to hold stocks which are believed to be expensive and they are only going to fall in future.

Vetri Subramaniam, group president and head-equity, UTI AMC

Our equity funds do not take asset allocation calls. We believe that investors have allocated money to our equity funds based on a certain asset allocation plan that is in line with their financial goals. In that case we would be conflicting with that objective by taking an asset allocation call. Investors should work with an advisor who can guide them. Such a plan would take into account various issues including the valuation and attractiveness of different asset classes; the potential liquidity needs of the investor and the target asset allocation range for the investor to achieve his financial goals. We do recognize that some investors demand from us products which invest in multiple asset classes and even manage asset allocation—we have a range of products to meet this need.

As regards equity funds, our track record over time (we have funds with a 25-30 years track record) suggests that we have been able to add value by creating Alpha for our investors relative to the benchmark. This is our core value proposition. We are able to do this by taking active calls on stock selection, sector allocation and market-cap bias of the portfolio.

Ravi Gopalakrishnan, head of equity at Canara Robeco Mutual FundEquity Funds ideally should have minimal cash levels at any given point because investors invest their savings with the objective of participating in the equity markets. Investors through their advisors typically consider whether to invest in a particular asset class based on the macro economic situation, corporate earnings outlook, interest rate outlook, etc. Depending on valuation of debt and equity markets, these investors/advisors decide to allocate funds based on the optimal asset allocation mix. Hence, fund managers of equity funds have to essentially remain fully invested at all points since the asset allocation decision has already been taken by the investor.Taking a call on the market valuation can be very tricky as market valuations can remain elevated for a long period of time and investors can miss out on significant portion of their upside in case the fund manager choses to increase cash levels. Instead, fund managers should focus on individual stock valuation and determine whether the stock is overvalued and then replace it with some other reasonably valued investment opportunity.

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