Equities managers should manage equities, not cash

John,

RE: "Fundamentally, they are being hired to manage a portfolio of equities, not to time the market." As an adviser I would disagree, managers such as Montgomery, Pengana and Allan Gray are paid to manage client's money and obtain the best return while minimising loss (something clients are very concerned about). A manager who has to be fully invested in the underlying asset class in this case equities is investing regardless of valuation. If a manager can't find a stock to invest in that meets their return and risk criteria then I am happier for them to hold more cash until they can. The comparison to the benchmark is not relevant, noting that all index funds under perform the benchmark and you will note that longer term performance of funds like Montgomery and Pengana is superior than the benchmark.

G'day John,

I really think you have put a solid case forward. Current market conditions and client profile however are partly responsible for strengthening your arguments.

In 2010 we launched the (also eponymously named) Montgomery [Private] Fund, which has $1 million minimum and the flexibility to hold 100% cash! The fund counts as its clients some of the nation's wealthiest individuals and families for whom capital preservation is paramount. Indeed when markets fall 30%, they would not be delighted to hear from a manager who says their fund "only" fell 27%.

Back in 2011 and 2012 the markets went backwards and the number of domestic funds that generated positive returns could be counted on one hand. The Montgomery [Private] Fund was amongst them and its clients are extremely appreciative. There are advisers who prefer all their managers to be fully invested at all times, and the cash allocation decision can be made elsewhere. But I reckon the guys at the coal face are best qualified to decide when to be fully invested or otherwise.

Current market conditions are unusual and the period of overvaluation has been extended by unprecedented central bank intervention, but as Herb Stein famously observed; "if something can't go on forever, it must stop". The debate 'for' and 'against' holding cash should not be had while the mountain climber stands on the summit. We should wait until he climbs back down and gets back to base camp safely.