Cash level no protection for mutual fund portfolios; buyers beware, say, leading fund managers

Equity mutual fund schemes of the top 26 fund houses held nearly Rs 80,000 crore in cash by the end of July 2024, showed report

Amid market fluctuations and valuation concerns, equity mutual fund managers are adopting various strategies to mitigate portfolio damage in case of a market correction. However, the overarching message remains “buyer beware.” This sentiment was clearly conveyed at the Moneycontrol Mutual Fund Summit 2024, held in August.

During a panel discussion titled “Flows – Boon or Bane,” leading fund managers shared different perspectives on portfolio protection strategies. These approaches ranged from making significant cash calls to adjusting the portfolio’s focus toward low-beta stocks (beta measures how much a stock—or a portfolio—moves compared to the benchmark index).

Despite these varied strategies, the general consensus among fund managers is a reluctance to take significant active cash calls. They largely operate under the assumption that investors have made their decisions based on proper asset allocation, and the fund managers’ mandate is to remain predominantly invested in equities.

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Ashish Gupta, CIO of Axis Mutual Fund, highlighted that increasing cash from 90 percent to 95 percent offers only a marginal hedge and doesn't significantly impact returns. He said, "On equity funds, we generally don't want to play too much with the cash levels because I think the asset allocation decision is being made by someone else (the investors and their advisors), depending on their comfort with valuations, earnings, sectoral mix, and other factors. We would kind of tinker around with the beta of the portfolio as all of us (mutual fund managers) are benchmark investors. "

Roshi Jain, Senior Fund Manager at HDFC Asset Management, echoed the same sentiment. She said while she is running slightly higher cash levels than usual in her funds, "we still remain 90 percent invested into equities as the long-term horizon of markets looks optimistic."

She added, "Even with those slightly higher cash levels, we are still 90 percent invested. So, while 10 percent may appear on the higher side, there's 90 percent which is still invested. The only nuance is that the time horizon at this point genuinely has to be long-term. A ballpark of five years will still make your risk spread adjusted."

Dinesh Balachandran, Head of Equity at SBI Mutual Fund, noted that while high cash levels are often seen as a good contrarian bet, the fact that cash levels are elevated across the industry indicates a general discomfort with current valuations. He said, "For example, in a contra fund right now, the cash level is around 13 percent. So, you could say that I've been somewhat uncomfortable with valuations."

He pointed out that the lack of lucrative investment opportunities is also contributing to the high cash levels. "About three years ago, I could set a 20 percent IRR threshold and find a lot of opportunities. Even two years ago, if I set a high teens IRR threshold, there would be a reasonable range of opportunities. Right now, if I set an IRR above 15 percent, it's extremely difficult to find good opportunities. But the question I ask myself is whether, given that all other alternatives are in single digits, I should still aim for a 16-17 percent IRR threshold or if I'm okay with a slightly lower IRR threshold."

Balachandran concluded that a slightly lower IRR threshold of 13 percent is "not so bad" as valuations continue to rise.

The fund manager who came across as a contrarion was Rajeev Thakkar, CIO of PPFAS Mutual Fund, which manages Rs 67,605 crore of assets under management. He said, that his cash levels are currently above average given the present market scenario. Thakkar said he never subscribed to the theory of remaining fully committed to equities simply because there is an inflow of capital, without paying heed to valuations and market outlook. He prefers to take active cash calls and currently holds 15 percent in cash in his funds.

According to a Motilal Oswal report, equity mutual fund schemes of the top 26 fund houses held nearly Rs 80,000 crore in cash by the end of July 2024, a 27 percent increase from June’s Rs 62,700 crore. This raised the aggregate cash proportion to a 15-month high of 5.4 percent, up from 4.6 percent in June.

This surge in cash reserves follows a strong bull market, with the Nifty 50 trading at a 12-month forward PE ratio of 20.2x, above its five-year average of 19.3x.

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