A substantial cash position could reflect a preference to simply wait for better deals.
The most hated asset class in the world is one most investors wouldn't even consider an asset class: cash.
Cash is often characterized as dead money earning next to nothing and acting as a drag on overall returns. It's best deployed as quickly as possible and put to use in other, more productive vehicles, the argument goes.
These days, investors seem willing to trade in cash for virtually anything that might earn them yield, no matter how small – even negative.
But what detractors of cash may fail to recognize is its value in terms of capitalizing on future opportunities.
"Investors are willing to accept negative returns on many asset classes right now rather than hold cash. This is totally irrational," said Jesse Felder, former hedge fund manager, and now publisher of The Felder Report newsletter.
Contrarian investors are typically drawn to those assets least in favour. "What is most hated usually presents the greatest opportunity," Mr. Felder wrote.
"We view cash as always a legitimate alternative," said Stephen Groff, a portfolio manager at Cambridge Global Asset Management. "If we don't see attractive risk-reward opportunities, we will hold cash."
A large weighting in cash need not result from a big bearish market call, Mr. Groff said. Many will liquidate riskier assets and retreat to cash to avoid a loss of capital in anticipation of a major sell-off.
But a substantial cash position might also reflect a preference to simply wait for better deals.
The funds Mr. Groff manages currently carry as much as 30 per cent cash, he said.
"In Canada right now, it's more difficult to find a lot of great value, which is why cash balances are higher in some of our Canadian funds."
Many fund managers are mandated to be fully invested, and that approach seems to have pervaded popular sentiment as well, Mr. Groff said.
The bull market has generally rewarded those with all available capital in securities, while cash holdings would have, for the most part, carried a cost in terms of lost returns.
But for the patient investor, cash can be used to act on extraordinary opportunities when they arise. Those with minimal cash would have to liquidate something in their portfolio in order to raise funds for opportunistic investments.
"When you come in one morning and something crazy happens, and stocks are off meaningfully, trying to sell something to buy something else is very difficult," Mr. Groff said. "That's not when you want to be reducing those other positions."
In other words, cash has value in what's called its optionality.
There are other cash hoarders who treat cash the same way, none more famous than Warren Buffett at Berkshire Hathaway.
"He thinks of cash differently than conventional investors," Mr. Buffett's biographer, Alice Schroeder, said in an interview with The Globe and Mail four years ago. "This is one of the most important things I learned from him: the optionality of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price."
As of the end of June, Mr. Buffett had built up a vast cash hoard in excess of $70-billion (U.S.) – the highest sum in his more than 40 years as Berkshire's chairman.
In Canada, Prem Watsa, chief executive officer of Fairfax Financial Holdings Ltd., has a Buffett-like attitude toward cash.
In an earnings call with investors a few years ago, Mr. Watsa was asked why he had 30 per cent of the company's capital in cash.
Mr. Watsa called back to the financial crisis and stock market crash, when equities dropped by as much as 50 per cent. That would turn out to be the investment opportunity of a lifetime.
"The only people who could benefit from that were the people who had cash or government bonds," Mr. Watsa said.
By deploying the company's cash, Fairfax made $2.8-billion after tax and raised its book value by 150 per cent from 2007 to 2009, Mr. Watsa said. "The cash gives us a huge advantage in terms of taking advantage of opportunities as and when they come."
As Winnipeg-based fund manager Larry Sarbit wrote in The Globe earlier this week, "Cash, in our opinion, is anything but trash. ... Today, our cash weighting is around 50 per cent."
Tim Shufelt