The cost of getting it wrong

Pie Funds founder Mike Taylor says holding too much cash through the start of 2019 ended up costing its funds' returns.

Friday, January 17th 2020, 6:00AM

Taylor said at the end of 2018, share markets had been through a sharp downturn – the worst December for the S&P 500 on record.

His fund managers responded by moving funds very defensively to up to 60% cash.

But the downturn did not last as long as Pie Funds expected, which was to its detriment and Taylor said it was too slow to jump back in to the market. "It was the right call at that time … but we were too slow to bring our cash back down to appropriate levels.”

The S&P 500 and NZX rebounded to clock up a 30% return.

“As we’ve discussed with clients many times, directly and in our newsletters, holding high cash through the final quarter of 2018 was the right call, given the severity of the September-to-December ructions.

“But we held on to it for too long, showing the inherent difficulty of trying to time the market. Our concern the post-Boxing-Day-2018 recovery was fragile and wouldn’t last, was misplaced. Cash stayed too high and, while we steadily reduced it through 2019, we failed to capture all the strong market recovery characterising most of 2019.”

In the year to the third quarter of 2019 the growth fund returned 18.76% after charges and tax; Growth 2 15.5%; and conservative 2.96%.

“The ‘good defence’ impact of having high cash in late 2018 shielded most investors from the worst of the downturn (which showed up in the performance of the funds’ market indices). This provided funds with a good base for more supportive markets in 2019,” Taylor said.

“Two important perspectives arise from these figures. First, given the average cash level across all funds for the two-year period was 30-35%, the risk-adjusted, stock-picking-fuelled performance for some funds is even more impressive. But, second, we can’t – and don’t – congratulate ourselves too much about that. Because it’s also true that had we reduced cash sooner, results for our investors would have been better still.”

Pie Funds closed its multistrategy fund in November, citing poor returns.

He said markets were always volatile and there would be different reasons for that over the coming year. But the funds were more fully invested now than they were at this time last year.

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