A report in the Australian Financial Review has noted that fund managers are increasing their cash levels according to a survey by Bank of America Merrill Lynch.
Interestingly, the survey found that cash as a percentage of funds managed has risen to a level last observed in November 2001 and correspondingly investor appetite for risk was recorded as the lowest reading in around four years!
How much cash should you hold?
While many fund managers often have their cash allocation decisions partially determined for them by their mandates; individual investors essentially have the option of holding a cash balance ranging from 0% and 100%.
It's really more art than science when it comes to determining your cash levels, but certainly the biggest advantage of holding cash is the optionality it provides to quickly deploy funds when opportunities arise.
One only needs to review the events of 2009 to see the huge opportunity which presented investors who had cash available to deploy when the market bottomed during the Global Financial Crisis (GFC).
On the flip side, holding cash does come with its own set of risks. For example, holding cash requires an ability to accurately time the market – an endeavour which eludes even some of the most successful investors.
So how do you gauge what percentage of your portfolio should be allocated to cash?
While far from perfect, one way is to review the actions of peers you respect. Here are two fund managers which I keep my eye on.
The Platinum Asset Management Limited (ASX: PTM) flagship fund, Platinum International Fund has a net cash position of 25.6%.
Meanwhile, the flagship fund run by Magellan Financial Group Ltd (ASX: MFG) had a total liquidity position of 15.3% as at 31 March 2016.
