How much cash are you holding in your portfolio right now?

With all the uncertainty in equity markets, and professional investors looking for other places to put their money, cash is having a moment in the sun. 

I reached out to Charlie Viola, Managing Director of Wealth at Pitcher Partners, to understand his thinking on cash in portfolios.

Viola provides financial advisory and wealth services to high-net-worth and ultra-high-net-worth individuals, so he understands the need to protect and grow wealth. But servicing this client base also means he understands that cash is just one of the options for investment, alongside markets and other types of investments only available to wholesale investors.

Note: this interview took place on Friday 6 October 2023. 

Right now, how much cash are you holding in your portfolio?

Viola: We don’t really have a target allocation for cash. We see cash as just money waiting to be invested elsewhere. Over the last 12 months or so, we have been reasonably passive in terms of new equity allocation, and even new private market allocations. Cash balances have certainly grown and they've grown to higher than historical levels. 

Generally speaking, most portfolios are run with between 8-13% cash. Right now, they're higher than that, more at 15-20%, just by virtue of the fact that we haven't been reinvesting money.

Has this weight to cash changed over the last year?

Viola: We have sat on our hands a little over the past six to eight months, so cash balances have increased a little. We have not re-invested money that has come back from various maturing assets, which again, has naturally pushed cash values up.

What are the reasons driving your current allocation to cash?

Viola: We continue to see a fair number of headwinds in markets. As the cost of capital continues to increase, we see that flow into earnings numbers. We are happy to keep some powder dry as we wait for the right opportunities to go back in and invest.

Private market opportunities, or maybe in some of those kinds of secondary markets are where the opportunities are coming up and where we are looking to invest client money.

Private market investments are just unlisted private assets, where groups of fund managers or family offices put together syndicates of investments. Whether they are private equity investments, property investments or debt or credit investments, they're not generally available to everybody. They're a private market that is available to wholesale investors and given that we deal with ultra-high net-worth investors, we see a lot of that stuff. 

Private market opportunities need to be really attractive at present for us to be participating in them. We've seen the impact of rates being felt across the board on valuations. 

As for secondary markets, it could be in private equity where they are doing a follow-up capital raise. Often that follow-up capital happens where markets have fallen and where valuations are falling away. They're now getting cheaper than what they were previously. 

Whether it's in debt markets or credit markets, or even in equity markets, there's a bit of distress around. So there are some really good managers and smart people that are putting strategies together in that distressed space.

What catalysts are you looking for to change that?

Viola: We are looking for deeper weakness in equity markets to allocate more there, and as I noted earlier, the private market opportunities need to be really attractive at present. Cap rates have blown out a little and the impact of rates is being felt across the board. 

How do you expect cash to perform over the next 12 months? What investments or instruments will you likely be holding to make the most of that?

Viola: Remember, cash is just there waiting to be invested in proper assets that drive income and growth. We do invest in some interest rate-sensitive investments, like debt and credit, but right now those investments carry more risk than what they previously did because someone on the other side still has to make the interest payment. 

The risk-free rate is between 4-5% depending upon whether it's a high interest account.

So, for the moment, we're happy to hold genuine cash at that risk-free rate and then wait for better opportunities in other markets.

My message to the market is cash is not really an asset class. Cash is parking money and waiting for it to be invested elsewhere. It makes absolute sense right now to have some dry powder. And it makes sense to be discerning about what assets you're buying because there is a fair bit of risk around. 

So, my message to all investors right now is to be really discerning. And then wait for those deeper levels of weakness in the market when there are really good opportunities that come along.