Cash is not king for schemes

Holding more than 10% in cash for too long may hurt returns and increases chances of missing a rally

The saying — cash is king — is largely true in any tough global scenario when the market remains abysmally low or rangebound for a long period. Globally, fund managers do hold cash significantly in their portfolio as long as they believe that the ongoing market trend(s) is not supportive. This, after fund managers burnt their fingers in the financial crisis in 2008.

In India, too, fund managers have been exposing their portfolios to high cash levels to tide over market uncertainty. By subscribing to higher cash levels, they may tend to beat the benchmark but on hindsight, they may also miss a rally if the market turns up.

 

Factors like high redemption pressure, frequent profit booking, defensive strategy and global uncertain scenario let fund managers to sit on cash. However, if cash remains at an alarmingly high level for a stretched period, fund managers’ skills are questioned.
 

CASH-IN-HAND
Fund houses	AAUM (Rs  Crore)	Avg Cash (%)	Avg Exp Ratio (%)
Daiwa	15.90	11.20	2.49
Peerless	25.50	10.35	2.50
Edelweiss	61.70	28.45	2.43
Escorts	86.20	17.20	2.50
Quantum	111.10	9.94	1.25
Taurus	324.00	9.76	1.19
Morgan Stanley	1544.50	3.23	1.87
IDFC	4776.00	11.25	2.02
Birla SunLife	10255.80	1.88	2.06
DSP BlackRock	11790.80	2.46	2.00
ICICI Prudential	15321.80	9.86	1.92
HDFC	37941.30	2.73	1.83
Note: Funds include Diversified Equity, Balanced, Sectoral, Index, Tax-saving funds Source: MOSL Research

Investors must check with the manager if their fund has cash of 10 per cent or more for a long period. But, this may not be true for all funds and can vary.

Fund category with most cash
Among diversified equity funds having Rs 1.36 lakh crore worth of average assets under management (AAUM) (March 2012), multi cap funds hold the highest average cash of 6.07 per cent followed by 4.91 per cent in small and midcap funds and 3.59 per cent in large cap funds.

This shows that large cap fund managers tend to face less volatility and hence hold less cash. However, some multi cap funds have the leeway to maintain high cash levels as defined in the investment policy. They wait for an opportune time to invest.

Seasonal funds having AAUM of over Rs 500 crore (like UTI Wealth Builder Fund, ICICI Prudential Dynamic Plan, IDFC Premier Equity Fund) have maintained an average cash level of 18.6, 20.10 and 10.60 per cent, respectively, in the last 2 years.

Funds with an AAUM of less than
Rs 100 crore tend to maintain higher cash levels as fund managers may not want to time the markets and aren’t sure of likely redemption pressures.

Fund house with most cash
Smaller fund houses tend to hold higher cash as their AAUM is low. For instance, Edelweiss Mutual Fund, Daiwa Mutual Fund, Peerless Mutual Fund, Taurus Mutual Fund have cash of 10 per cent or more.

Fund houses managing larger AAUM have lesser cash allocations at 5 to 6 per cent. Schemes with AAUM of more than Rs 1,000 crore see an average cash level of 1.88 to 6.02 per cent. Exceptions are IDFC and ICICI Prudential Mutual Fund, which maintain near 10 per cent. They score because only two funds - ICICI’s Dynamic Fund and IDFC’s Premier Equity - hold cash up to 20.3 and 16.5 per cent of the portfolio. All large fund houses like Birla SunLife, DSPBlackRock, HDFC, Reliance, UTI, SBI, Franklin Templeton maintain cash at close to 5 per cent which is quite acceptable.

High cash, high expense ratio
Smaller fund houses tend to maintain high cash levels but also levy high expense ratio, typically near 2.5 per cent. Exceptions are Taurus and Quantum Mutual Fund, who charge 1.19 per cent and 1.25 per cent, respectively, with a low AAUM and higher cash levels. Equity funds levy high expense ratio for managing equity despite having higher cash allocation, which is not in the best interest of investors.

Funds may miss the bull run
Higher cash allocation does protect a fund from any downside movement. However, such funds also tend to miss the rally if the market has to move up in that duration as they hold on to cash and deploy it in the market.

It is seen very often that such funds fail to deploy money at a lower index level and blame the volatile equity market for being a non-performer. In reality, it is their lack of investing money at the right time that impacts the portfolio performance.

Larger funds having high cash allocations (ICICI Prudential Dynamic and IDFC Premier Equity - Plan A) have beaten their category average which shows that their fund management skills are better despite sitting on higher cash level. But other funds have failed to prove their mettle. As a result, investors have been losing as they have been paying higher expense ratio and also suffering due to poor fund performance.

To conclude, investors must watch their funds’ cash position carefully. If a fund is growing which is accompanied by high cash allocation, investors should consider discontinuing their investment in that fund. And monitor the fund manager’s ability to make money and check with the past asset allocations of the fund. Fund manager’s past record will also help you judge his portfolio management skills and take an informed decision.

If investors are better off playing dynamic asset allocation (depending on market valuation) which comprises on returns to some extent, they should invest in funds which may maintain higher cash allocations but follow a balanced approach else choose a fund with a good trackrecord that has remained fully invested with small cash holding of up to 5 per cent.

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The writer is senior manager – research & advisory (third party products), Motilal Oswal Wealth Management