Fund managers cut their cash stockpiles to record lows as they piled in to buoyant stock markets in the second and third quarters, prompting concerns over how they would cope with a fresh surge of investor redemptions.
Many investment funds built up cash buffers after being hit by large redemption requests when the coronavirus pandemic exploded in March. However, new research by data provider eVestment shows cash positions have sunk back to their pre-coronavirus levels.
Equity funds’ median cash position declined to 1.8 per cent at the end of the third quarter, the lowest level in the 13 years that eVestment has compiled the data. By contrast, fund managers held as much as 2.5 per cent of their portfolios in cash at the end of March.
Markets have roared back from their March lows as economies gradually reopened, enticing investors back to investment funds.
But Peter Laurelli, eVestment’s head of research, said the sharp decline in cash holdings was surprising given the likelihood of fresh market turmoil in response to looming economic pain from a second wave of coronavirus lockdowns.
“It implies that equity managers, at the median, returned to having very low concerns for investors to be using their products for liquidity purposes in the near term,” he said. “Given what feels like a tenuous economic environment and unprecedented government influences, I would have thought cash levels would have come down more slowly.”
Mr Laurelli pointed to the 2008 financial crisis, when cash positions did not return to their pre-crash levels for a full year.
Fixed income funds’ median cash buffers remain higher than those of equity funds but have also decreased, according to eVestment. At the end of March, bond fund managers held 2.7 per cent in cash but at the end of September this had fallen to 1.9 per cent.
Gabriela Figueiredo Dias, chair of the Portuguese financial regulator, the CMVM, said that while funds in Europe held up well during the initial coronavirus market shock, asset managers should not lower their guard.
Ms Figueiredo Dias, an influential figure at the EU’s main financial regulator and chair of its investment management standing committee, voiced concern that while inflows into funds had increased recently, this “was not matched by an equivalent increase in liquidity positions”.
“Given the uncertainty we face, higher levels of liquidity would provide the European funds sector more resilience to cope with possible negative impacts of the second wave,” she said.
Not all investment funds have cut cash stockpiles. Money market funds, which investors trade in and out of frequently, have increased the amount of easy-to-sell assets they invest in.
According to Fitch, dollar-denominated money market funds sold in Europe had average weekly liquidity levels of 56 per cent at the end of August, compared with 45 per cent at the end of February. Euro-denominated money market funds’ liquidity levels rose from 39 to 53 per cent over the same period.
Derville Rowland, director-general of the Central Bank of Ireland, said elevated cash levels at money market funds showed that managers were nervous about future market stress and a repeat of the “dash for cash” that occurred in March.
