Jeff Bunce: Stock prices have rallied in the past few years and are broadly outpacing the growth in underlying earnings. This means stocks are getting relatively expensive compared to recent history, particularly in the United States where on the basis of trailing 12-month price-to-earnings ratios, valuations haven't been this high since the early 2000s. Valuations in Canada and in international markets have been rising over the past few years, too.
Some managers will respond to the value they see in the market by ratcheting up or down cash in their funds. Of the managers that receive a Morningstar Analyst Medalist Rating, three in particular stand out for taking their cash stake significantly higher lately.
The manager of Bronze-rated CI Cambridge Pure Canadian Equity likes to keep 10% cash on hand to buy new names when opportunity arises. So, the fund maintains relatively high cash balances at all times. The fund's cash balance has been trending even higher though, and now stands at over 21%, indicating that the manager is having trouble finding stocks that meet his buy criteria.
Cash in the Bronze-rated Brandes Global Small Cap Equity has risen from modest levels at the start of 2014 to almost 17% of the fund at the end of March. Brandes's small cap portfolio has had strong returns over the past couple of years, and sticking with his strict valuation approach, the manager has been taking more profits and selling more names than he has been adding. Brandes is particularly light in U.S. stocks, where it has long held that prices are too high.
Lastly, Silver-rated Edgepoint Global Portfolio has seen its cash stake rise 10 percentage points over the past year to over 15%. The manager's portfolio is heavily concentrated in the U.S., but they have been trimming the majority of portfolio holdings regardless of the region.
A high cash balance means these funds will likely fare better in an equity market downturn, and they will be able to respond to lower prices and buy at lower valuations. However, timing is a risk. In the interim, markets may continue higher and the funds will have a hard time keeping up. Indeed, each manager has faced a substantial drag on returns over the past year as their cash has earned little to nothing while stock returns have been in the double-digits.
For Morningstar.ca, I'm Jeff Bunce.
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