Of all the position decisions across the broad asset classes, cash is always the one that causes the most angst. In a strategy that focuses on trend and relative strength analysis, under/overweight decisions are fairly straightforward in the crafting of an allocation amongst equities, fixed income, commodities, etc. Ideally, when we trim one asset class or sector, we shift capital to a more attractive investment class, based on our research. On occasion, that asset class is cash. Since early July our Tactical Trend Allocation portfolio has carried a 15%-17% cash position, which provides us with some dry powder as the domestic equity market drifts lower.
Psychological Challenge
Owning cash brings with it a daily psychological challenge. We are currently earning nothing on that capital. On up days I curse our cash position! On weak days I curse that we don’t have enough! Cash is often an overlooked asset class that can be met with some derision. In reality, cash is the oil that can grease the engine of performance. Incremental cash raises help to control risk in weaker trading environments and allow opportune buying when momentum and trend reestablish themselves.
Due to the multiyear strength in the equity markets, there has been a shift to focusing on strategic allocation and a “set it and forget it” index approach, with an eye on the long term at the expense of a more tactical approach. The one lesson that the market will continue to teach us is that when you have identified a particular style of investing as the best way to invest, you had better start looking around for the club that is about to hit you on the back of the head. Domestic equities have provided us with tremendous returns over an extended period. We’ll remain flexible, continue our work, and let the market show us where capital will be best treated going forward.
Matt McAleer, Sr. Vice President & Portfolio Manager