Investors turn to cash for safety as Grexit and bond market woes leave fund managers scared

Greek worries have only added to market uncertainty

Investors should raise cash levels while instability in the Eurozone rumbles on, top fund managers are warning.

A combination of Greece worries, US rate hike uncertainty alongside recent changes in bond markets mean investors may be better off taking cash out of markets for the summer, says Chris Iggo from Axa Investment Managers. “The more it seems no agreement can be reached with Greece, the more investors will sit on their hands. That makes for a summer of trouble, so it may be best to de-risk, raise cash and head for the beach,” he says.

OVERPRICED ASSETS

Many fund managers are holding higher levels of cash than normal at the moment, partly as a response to various risks around the globe, but also because few assets seem cheap.

Money has been pumped into economies through central bank QE programmes and much of this has found its way into investment markets, sending asset prices to new highs.

While stock markets in the UK, US and China linger around record levels and bond yields are exceptionally low, prices in many areas seem divorced from their fundamental worth. “It is certainly the best time to hold more cash,” says Christopher Dembik from Saxo Bank.

“Uncertainty about monetary policy is very high, stock markets are stuck on a plateau and speculative bubbles are appearing.” It is probably not the best time to enter the market. There are many risks arising from this prolonged period of low market volatility and complacency.”

BOND MARKET TROUBLES

Crucially, managers’ concerns are not solely about the future direction of equities.

In the bond market, investors have been buying lower-rated credit as they chase returns. Liquidity in bonds is extremely tight, and with so many people invested in the same area, things have begun to seem crowded.

Ultimately, QE has led to “crowded positions in peripheral debt, subordinated credit and high yield,” Iggo says. This will be problematic if everyone tries to sell at the same time, and some managers are pre-empting this by choosing to sell now and hold cash instead.

“There is a massive problem if investors exit these crowded positions quickly, given the lack of liquidity in bond markets and the lack of obvious buyers. This becomes a little self-fulfilling as bond portfolio managers de-risk their portfolios and raise cash levels to anticipate potential outflows,” he explains.

SPREADING RISK

To circumvent these problems, fund managers across the board are having to be far more selective with where they invest, and alongside cash some are also recommending traditional safe havens such as precious metals.

“The high level of debt in the economy presents a risk for the global financial system,” says Ian Spreadbury from Fidelity Worldwide Investment. “In this environment, I believe investors should hold a variety of assets and avoid concentration in particular areas. This includes diversifying into areas such as cash and precious metals.”

PERSONAL PORTFOLIOS

For private investors, whether to hold more money as cash will depend on your reasons for investing.

Those who need money in the near future would be wise to switch into cash now, says Darius McDermott of FundCalibre. “If you need the money soon, many equity markets have hit all time highs and bond yields can’t really get much lower, so you might want to put money into cash to make sure you have it when you need it.”

"Also, it is worth looking at what your fund manager is doing too – some are bearish and have quite high cash weightings at the moment, so they may be doing the job for you.”

McDermott emphasises that people with a time horizon of many decades would be better off just leaving their investments as they are. The general trend for equity markets is upwards, over a long period of time.

“It is extremely difficult to time markets. Markets could continue to climb the wall of worry for another 12 months or they could take a hit tomorrow due to Grexit worries, interest rate rises, or another market shock,” he says.

For those worried about how bond and equity markets will fare, McDermott suggests one solution could be to invest in a targeted absolute return fund. These funds aim to make money regardless of whether markets are moving up or down, often by using a variety of special strategies. The sector is very varied so requires a lot of research, but two which McDermott says have consistently produced positive returns with low volatility are the SVS Church House Tenax Absolute Return Strategies fund and the Premier Defensive Growth fund.