The S&P/ASX 200 (INDEXASX: XJO) has been faring relatively well over the past 3 months. Since the lows we saw on 23 March, the ASX 200 has recovered more than 32%. Even though the ASX 200 is still down around 9.8% since the start of the year, considering all that has gone on with the coronavirus pandemic, ASX investors may be feeling a slight sense of relief.
But after the run of the past few months, many investors are now asking “where to from here?”. After all, the outlook for the broader Australian economy and the ASX shares that dwell within it is still very uncertain.
One ASX fund manager is taking a big bet on this question and the direction of this bet should at least cause some angst for investors today.
Enter the ultra-bear
Chris Mackay is the fund manager of MFF Capital Investments Ltd (ASX: MFF). MFF Capital is a Listed Investment Company (LIC) that used to be part of the Magellan Financial Group (ASX: MFG), which Mr Mackay was a co-founder of. There are still some links between the 2 companies, but they are more-or-less independent of each other these days.
Mackay has proved himself as one of Australia’s best fund managers in my view. Over the past 10 years, Mackay has grown MFF’s value by a cumulative 350% (an average of 16.21% per annum). This figure excludes dividend payments.
MFF Capital primarily invests in US-listed shares like Visa, Mastercard, Microsoft and Home Depot, forming the lion’s share of the company’s portfolio.
But MFF’s largest position these days is in cold, hard cash. In an update yesterday, Mr Mackay informed the market that the company’s portfolio is sitting at 44% in cash as of 30 June 2020.
Having 44% of your fund’s assets in cash is another way of saying you’re bearish over shares in the short-term.
So, what has Mr Mackay spooked?
Well, here is some of what he had to say to his investors in the ASX update:
“Cash is MFF’s largest holding. We prefer not to hold significant amounts of cash for long periods. Cash is a wasting, non earning asset… We far prefer significant holdings in sustainably advantaged businesses on sensible terms. Cash and savers fare badly under inflation and financial repression. However, cash is usually valuable in crises for managing advantaged purchases when asset prices fall significantly in relative and absolute terms. Our investment approach has benefited from past market cycles, when purchases were possible at low prices but near term economic and business outlooks were terrible.
Assessment of successful longer term investments looks beyond short term marks to meet market and comparisons with indices and other investors. So far this time we have retained cash rather than risk permanently destroying capital with overpriced purchases or seeking to trade for prices in the market recovery in recent months.”
Should ASX investors follow MFF into bearish territory?
As an investor of MFF myself, I have a lot of respect for Mr Mackay. Therefore, I find his bearish insights troubling.
In my view, having a 44% cash position isn’t just having a foot in both camps; it’s an all-out bearish bet on lower share prices in the near future. It’s not too hard to read between the lines of what Mr Mackay had to say; he clearly is expecting some kind of correction or crash on the horizon.
I myself have been trying to increase my portfolio’s cash position recently (though not to the extent of Mr Mackay). None of us knows what will happen in the markets next year, next month or even tomorrow. But I do think the current circumstances warrant a lot of caution.
So, if you agree with Mr Mackay, looking at your own cash position might be a good idea. Remember, the worst time to sell a share and increase your cash is when the market is already crashing.