A warning about too much cash

• Tweet

Morningstar, in its review of New Zealand equities strategies, warns about fund managers holding too much of their portfolios in cash.

Wednesday, May 21st 2008, 7:28AM

Brook, Milford, Mint, and Tyndall all had more than 30% invested in cash at March 31, with Milford sitting around the 70% mark.

Morningstar says that it is "comfortable with fund managers having some latitude to go to cash" however, it warns that managers may miss out on the market upswing when it comes and performance starts to be driven by asset allocation, not stock selection.

"Investors should note, though, that these cash-heavy strategies risk missing an initial upswing. April was a prime case in point – in that month, the New Zealand sharemarket bounced back and returned 4.50%. This was the strongest monthly return since December 2006, and the resurgence will have been more difficult to capture with a high cash weighting."

Morningstar says if a manager can switch successfully that is a positive, however it notes not many can do that consistently. "The payoff is admittedly significant if switching of this kind can be achieved successfully, but few fund managers have demonstrated an ability to do so consistently."

The research house is also a luke warm on New Zealand share managers benchmarking their performance against cash.

It says some demand for this has come from clients, who want more than they can get from the bank.

"We're not keen on investors driving product design, however, as it can lead to the tail wagging the dog."

It notes that over the long term shares outperform cash, even in periods when New Zealand has had a high cash rate. "It is … for this reason that we take a dim view of cash-based hurdles for performance fees."

Comments from our readers

No comments yet

Add your comment:

Your name:
Your email:	Not displayed to the public
Comment:
Comments to Good Returns go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Anti-spam verification:

Type the text you see in the image into the field below. You are asked to do this in order to verify that this enquiry is not being performed by an automated process.