Is now the time to start deploying your cash?

As Forager Funds Management’s Gareth Brown puts it, markets are mixed at the moment. On one hand, we’ve been managing inflation and rapid rate rises – on the other, we’ve watched extraordinary jumps in the market courtesy of the AI tailwind. It might make you wonder, is now the time to sit tight or deploy your cash?

From Brown’s perspective, it’s always time to deploy if you see the right opportunity. He puts it as pricing the opportunities, rather than timing the opportunities – and he’s seeing a lot of opportunities he likes in the current market.

“We’ve had no trouble finding lots of interesting opportunities. We’re also finding things to do at the larger end of town, but specifically in sectors and geographies that are less flamboyant that are not associated with things like AI,” he says.

While this may all sound like Brown plans to be fully invested in equities, the truth is, he likes to maintain some cash on the sidelines as a “portfolio lubricant”.

“It allows us to move very quickly when we find new opportunities and put that cash to work, and conversely, we don't want to feel like we can't sell something because we don't have something to buy today,” he says.

In this episode of The Pitch, Brown shares how much cash he is holding, one of the opportunities Forager recently added to the portfolio and his tips for investors looking to deploy their cash.

This interview was recorded on Tuesday 11 June 2024.

Edited transcript

Where are we in the market cycle and are there any signals that you're monitoring?

For 20 years, we've been saying to clients: prepare, don't predict, and we really do try and live that way.

It's our job to price opportunities rather than to time them.

Life has gotten a little tougher over the last six or nine months as markets have risen, but don't forget that a big part of that has come from mega cap stocks that have gone to higher and higher levels in the smaller and mid cap parts of the market where our bread and butter is, it's a lot more of a mixed market and we've had no trouble finding lots of interesting opportunities. We're also finding things to do at the larger end of town, but specifically in sectors and geographies that are less flamboyant that are not associated with things like AI. So for us, it's a fairly normal time and you should expect a fairly normal amount of cash.

Some fund managers will be fully invested in equities, while others have more flexibility. Where do Forager sit on the spectrum?

It's our opinion that most investors should be invested mostly in growth assets over most of their lives. Holding big amounts of cash on the sidelines for years on end tends to be detrimental to your wealth. That said, Forager is very much an opportunistic fund manager, so holding 5-10% cash is a perfectly normal amount for us.

It's portfolio lubricant. It allows us to move very quickly when we find new opportunities and put that cash to work, and conversely, we don't want to feel like we can't sell something because we don't have something to buy today.

It’s fairly normal for us to hold 5-10%.

How much cash are you holding at the moment and would you ever hold more than the five to 10% range?

We're holding about 7% today. It has been in that five to 10% range as we've been recycling into new ideas and away from older ones. We will move outside that range. We have a very good track record of putting all the cash to work at periods of peak pessimism and panic.

In March 2020 at the bottom of the Covid low, for example, we were under 1% cash. It's hard to put that money to work, psychologically speaking. Not sure it can be taught, but it's something we do very well. On the other side, we will hold more than 10% when we want to be particularly defensive. Our preference is always to hold equities, so if we can find the right kinds of stocks - big, profitable cash generating business, we'd prefer that over cash, but we will hold more than 10% cash when we can't find enough of those opportunities.

What signs are you looking for to deploy your cash at the moment?

So again, we're trying to price rather than time. We are looking for cheaper valuations. That's the main driver for us. When we find them, we put the cash to work. When we can't find them, that is often telling us something about the broader market.

The other thing we look for is the general psychology of the market. We are looking for fear rather than people rationally doing the work around valuation and when we find that, we can put the money to work.

As we said, it's not something that comes easy to most people, but it's in our DNA. It's something we've done very well over the years and it's one of the reasons clients invest with us.

Are there any positions that you've recently bought into?

Of our top 10 positions, four of them are brand new this calendar year, so that's an elevated amount of new ideas for us and partly a reflection of the fact that the market's run up, but we're still finding things to do elsewhere.

Two of those positions are North American small cap stocks. One of them was an IPO. We'll talk about those with our investors soon enough. And then the other ones were large caps. One of them is called Fiserv (NYSE: FI). It's a payments business, rapidly growing, quite defensive and we think is a useful addition to the portfolio.

What would you say is a normal level of turnover for the portfolio?

It waxes and wanes a lot depending on market conditions and the opportunity set. Something around 30% would be fairly typical for us per year, but there’s a big difference between a high turnover year and a low turnover year for us.

What tips do you have for investors who are thinking about deploying the cash in the current market?

I think getting back to our first point there, which is to be mostly invested most of the time, that's how you want to be.

I think if you are wired like us and you're happy to walk into panicked and fearful markets and buy, then I probably don't have a lot to say other than maintain your patience. Don't fire all your bullets at the first downturn. I think most people are not really wired that way, and so they should probably recognise that.

How were you behaving? How were you acting when the Covid lows happened or in the GFC? If you happened to be around back then, how were you feeling? And more importantly, what were you doing? Were you buying stocks or were you're selling them?

I think going back and having an honest account of what you've done in periods of panic is a useful thing to do. You won't get everything right, but were you making sensible decisions and did they work out in the end? I think if you are recognising that you are not wired for stepping into panic like that, then I think you've just got to build some defences around it, be aware of it and act accordingly. That might be as simple as investing in an index fund and just being fully invested all the time, or you can find an active manager that you trust to take care of that stress for you and then just outsource the problem to them.

If you are interested about hearing more about deploying cash, have a listen to Forager's "Stocks Neat" podcast episode 29 here.