A turbulent financial environment may mean it's better to be in cash than fully invested in stocks, bonds and other assets, according to Mohamed El-Erian, chief economic advisor at Allianz.
"You cannot rely on correlations to be your main risk mitigator," he said at a news briefing Monday, referring to the strategy of investing in a diverse set of assets that are unlikely to all move lower simultaneously. "Cash remains a valuable thing to have in your strategic allocation."
Stocks swung wildly last week amid the latest Federal Reserve meeting and a rising focus on Thursday's U.K. vote on whether to leave the European Union. Meanwhile, overseas benchmark bond yields fell to record lows, with Germany's 10-year bund yield dropping into negative territory, meaning investors were essentially paying to hold government debt.
The level of cash holdings held by fund managers hit its highest since November 2001, according to a June Bank of America Merrill Lynch survey. Elevated cash holdings are typically associated with recessions.
However, El-Erian noted that cash gives investors resilience to last through turbulent times, the option to change course on new data, and agility to react quickly.
Recent trends in fund management strategy away from active or tactical to passive investing don't offer as much nimbleness, he said. Many managers may want to wait out volatility over the long term, but passive investment may not generate the best returns in a world where the S&P 500 lost 0.7 percent last year and is up less than 3 percent for the year so far. The index posted double-digit returns between 2012 and 2014.
"You have to be more tactical. Passive cannot be more tactical," El-Erian said, adding that it's "particularly bad for asset classes that are fragile" such as emerging market bonds, for example.
"What passive investment offers is the assurance that your fees are going to be lower and that assurance is worth a lot for a world where expectations for returns have come down," he said. "However, you pay for that by giving up the ability to be tactical and you pay for that by giving up common sense for certain asset classes that are subject to default."