Many fund managers are doing this right now – should you follow?

Many city fund managers are making a strategic move within their portfolios right now. Should you take their lead?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A glance at the financial news headlines reveals an increasing trend of late: many professional portfolio managers are adopting more defensive positions and increasing the cash levels in their portfolios. Indeed, according to a recent article from Investment Week, some portfolio managers are holding as much as 20% of their portfolios in cash at present.

So why are the professionals moving to cash and more importantly, should you follow?

Market highs, investor complacency

Looking at the strong recent performances of many key global stock market indices, it doesn’t surprise me that plenty of fund managers are cautious right now. For example, in the US, both the S&P 500 index and the NASDAQ have rallied to new all-time highs in the last few days, with investors piling into popular stocks such as Facebook Inc, Alphabet Inc and Amazon.com Inc. Here in the UK, the FTSE 100 has surged over 35% since its low early last year and is less than 2% below its all-time high set in early June.

It’s the general level of complacency among investors right now that clearly worries some fund portfolio managers.

Despite Brexit, Trump and talk of interest rate rises, the markets seem incredibly quiet at present. For example, the ‘short’ interest on the S&P 500 index – those betting on the market to fall, is at its lowest level since the Global Financial Crisis (GFC). And the CBOE Volatility Index (VIX), aka the ‘fear index,’ is trading at a level below 10, suggesting the stock market is enjoying a level of calmness not seen since 1993. This most likely means that it won’t take much for market volatility to return.

Is cash king then?

So should private investors follow the professionals and move into cash? In my view, retaining a little bit of cash on the sidelines right now is probably quite a sensible option. That’s because, while cash is no doubt a poor investment over the long term, it does provide the investor with valuable options when opportunities arise.

Think back to the volatility that arose after the Brexit vote last year. Investors were hitting the panic button and dumping domestically-exposed companies without paying much attention to the long-term prospects of such companies.

Lloyds Banking Group shares could be picked up for under 50p. Legal & General Group shares were trading around 165p. In short, there were many bargains available for the investor with cash on the sidelines.

Inflection point

While we may not see that level of panic in the near future, it would not surprise me at all if markets do undergo a correction at some stage later in the year. Indeed, Bank of America analyst Michael Hartness said this week: “The most dangerous moment for markets will be when rising rates combine in three or four months’ time with an inflection point in corporate profits.”

So in my view, it’s worth approaching the markets with an element of caution right now, and having a little bit of cash on the sidelines could be a good insurance policy. Enthusiasm for stocks is high, but as long-term investors it’s important to keep Warren Buffett’s advice in mind: “Be fearful when others are greedy and greedy when others are fearful.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Legal & General Group. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Amazon, and Facebook. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Should I buy more Rolls-Royce shares near 500p?

This investor is wondering whether to buy more Rolls-Royce shares this summer or to just stick with those he already…

Read more »

Investing Articles

After its big fall, is the National Grid share price dirt cheap now?

The National Grid share price fell sharply in reponse to new rights issue plans. But is it an even better…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Starting in June, I’d invest £1,000 a month to aim for a £102,000 second income in retirement

This author highlights a less well-known FTSE 100 stock that could help his portfolio generate a very big second income…

Read more »

Investing Articles

Down 47% in 5 years, is the IAG share price due a bounce?

Many companies in the travel sector have seen fierce rallies since 2020. But with the IAG share price still down…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Despite its drop, I reckon this is one of the best FTSE 100 stocks to buy and hold!

The FTSE 100 has been climbing in 2024 but this favourite of our writer's has been falling. Despite this, she’s…

Read more »

Investing Articles

AI stocks vs EV shares; which is the best sector for me to invest in?

Jon Smith considers the recent rally in AI stocks and weighs up whether to allocate more money there versus EV…

Read more »

A graph made of neon tubes in a room
Investing Articles

Do Greggs shares have even more growth ahead?

Greggs shares have seen some solid growth in the last few months, as the economy shows positive signs. But is…

Read more »

Investing For Beginners

How I’d aim to grow my Stocks & Shares ISA from £20k to £1m

Jon Smith explains how diversification and focusing on sectors for the future can help grow his Stocks and Shares ISA.

Read more »