Australian Fund Managers Sit on Cash as Markets Seesaw

While consumer confidence surged to a six-month high in Australia this week driven by a cut in interest rates, some Australian fund managers still unsure of what direction the markets will take, prefer to sit on cash.


The uncertainties in Europe, volatility in global stock markets and until recently tight monetary policy in Australia, have pushed many fund managers to keep up to 50 percent of their portfolios in ready money.

Chris Stott, Portfolio Manager at Sydney-based Wilson Asset Management, says half of his holdings are in cash, and have been so for the greater part of this year.

Kumar Palghat, Founder & Director of Kapstream, says cash comprises about 30 percent of his portfolio. He adds that he is waiting for some positive news out of Europe before putting more money to work.

For Palghat, this is only the third time in five years that he is holding so much cash. The other two times were during the global financial crisis in 2008 and again in 2010, when he held about 60 percent and 30 percent in cash, respectively.

Kapstream, which runs a number of fixed income funds, has about $4 billion in assets under management.

Campbell Dawson, Portfolio Manager at Melbourne-based Elstree Investment Management, which invests in bonds and equity hybrids, says he has been holding about 25 percent of his portfolio in cash for the past three months.

He is also awaiting more sustainable solutions on Europe's debt crisis before investing more actively. Dawson believes the bumpy stretches will likely continue for another 3 to 4 months.

Like the rest of Asia, the Australian market is in the red this year, down more than 10 percent since January.

The S&P ASX 200 index is now trading at a forward P/E ratio of about 12, below its historic norm of about 15. Despite cheaper valuations, some fund managers continue to stay on the sidelines, expecting assets to get even cheaper in the months to come.

"In times of crisis, you need to forget about the returns and protect your capital. We don't think the Euro zone crisis is over yet and we're still cautious," Palghat said.

Stott is also waiting for better opportunities to put his cash to use. "We're positioning ourselves to be ready, analyzing deep cyclical stocks for investment prospects. As we enter the loosening cycle, we may see more opportunities in the domestic sectors," he said.

Cash Versus Safe Bets

The problem, say fund managers, is getting the timing right. "There are a lot of good assets and debt instruments that are giving very good yields right now. But you don't want to be in too early," said Palghat.

Palghat currently holds the debt of Australia's four biggest banks, which offer returns between 6 percent and 8 percent.

Ben Lyons, Senior Investment Analyst at ATI Asset Management, is bullish on Australian bank shares. Three of the four big banks have outperformed the broader market this year.

NAB is the best of the lot, up 3.5 percent since January, while ANZ underperformed with a loss of over 12 percent in the same period.

Lyons also expects markets to stabilize once Europe's debt issues ease. But instead of keeping cash, Lyons prefers to play the defensive game and invest in gold miners such as Newcrest Mining, which is now trading at a forward P/E of about 17.6 times. "If Europe and U.S. print more money, that's going to be supportive for gold prices and gold stocks," he said.

For the time being, Lyon is avoiding big cap resources such as BHP Billiton and Rio Tinto. "We're watching iron ore prices right now. We like to see a recovery in commodities before we ratchet up on the big miners," he said.

Stott of Wilson Asset Management says he's looking at opportunities in the industrial and retail sectors, which will benefit from more monetary easing in Australia. "Lower rates would be good for retailers over the next 1-2 years," he said.

In the meantime, because of relatively high interest rates, Australian fund managers continue to get decent returns on their money. "We currently get about 5 or 5.5 percent return on our cash. I think it's important to keep cash now and wait for better opportunities to actively invest again," said Palghat.