17th March 2015
Tineke Frikkee, manager of the Smith & Williamson UK Equity Income Trust, explains how she has been making tactical use of cash in a see-saw market such as this can help cushion the portfolio from markets falls…
She ran up cash positions last September, in advance of October’s market correction, and similarly in December, when the fund held 14% in cash. It’s currently holding 12%, in anticipation of another fall.
Such tactical shifts are not determined by macro calls on the market, but from a bottom-up perspective, in line with the manager’s stock-picking approach. Frikkee explains: “Every stock I don’t hold has a notional buy price. Every stock I do has a sell price. If a stock hits that price – even if it’s only taken a fortnight to get there – then I’m out.”
Target prices are calculated on the basis of 10 year multiples, with the portfolio manager typically buying a stock somewhere around its mid-point, and selling when it gets to the top of the range. If it hits the target price, she will sell out of the position completely. “A typical position size is 2%,” says Frikkee, “so that will raise the cash in the fund proportionately. If there is nothing on our watch list that is attractively priced, we will wait until there is, rather than buy at valuations that are too rich.”
What’s more, the fund’s size – £44m – means it is nimble enough to liquidate positions or re-invest quickly. For instance, the fund was fully reinvested by the end of October, following the mid-month fall.
Frikkee says: “I don’t want to hold large cash positions over long periods, as this compromises the fund’s yield objective. But tactical use of cash can support overall returns in a volatile market.”
This use of cash is seeing the fund’s beta fluctuate between about 0.9 when the fund his fully invested to 0.7 with higher cash weightings.