In articles such as grains of truth and relatively speaking, The Value Perspective has argued it is becoming increasingly difficult for investors to find attractively valued assets to buy. One consequence of this situation is some very high-profile fund managers are beginning to challenge what might be characterised as the last taboo of value investing.
This is the idea that value-oriented managers should never move significantly into cash while they wait for better opportunities to present themselves. That may seem an odd stance for such a pragmatic investment discipline but there are plenty of people who take the view they give equity managers their money to invest in equities and, if the managers are not going to do that, they should give it back.
While such people can buy into the idea of investing in out-of-favour, cheap assets – that feels like bargain-hunting even if they may occasionally get their fingers burnt – they are not so comfortable with the idea of their capital being eaten away by inflation while their chosen manager sits on the sidelines in the belief there could be better, though as yet unidentified, opportunities further down the line.
Many see this as a fund manager actively making an asset allocation decision but that is not really the case. It is simply the manager saying they would, in the current environment, prefer to be in cash rather than invest into ideas they believe are becoming ever more unattractive or else water down their criteria as to what constitutes an acceptable investment just so they can buy something.
This is not often a big issue because some areas of the market will usually still offer opportunities. thus, to take a clear-cut example, as the technology, media and telecoms boom was reaching ever dizzier heights in the late 1990s, value managers could point to all the undervalued stocks in sectors such as tobacco, utilities and consumer staples that investors were shunned as too ‘old economy’.
Interestingly, another reason people do not like cash is because a manager will often want to move into it when they feel the market has done very well. But if it continues to do well, then not only do investors potentially see inflation eating away at the cash, they also feel they are missing out relative to what the market is doing in the short term – even if, over the long run, their manager is proved to have made the right decision. To return to the tech boom, the longer it went on, the more pressure investors (and some fund groups) brought to bear on the value managers who grimly stuck to their guns.
All of which made the recent London Value Investor Conference even more interesting. Noticeably larger than the inaugural event last year, it had attracted an impressive line-up of senior value investors from around the world and a number of them explained how, to a greater or lesser extent, they had warmed to the idea of cash.
At times such as now, when equity markets appear in robust health, many people can see a significant cash holding as a waste of time and money and yet, the harder it becomes to find attractively valued assets, the more valid the idea becomes. It was instructive to see some of the world’s top value managers not only working out how best to put that into practice but also how to attract a client base comfortable with them doing so.