7IM ups cash to near all time highs amid political risks

Investment

Seven Investment Management has increased the cash weighting to near all times highs in its cautious portfolios amid continued foreign and domestic political risks.

Today, the pound was hit in early trading on suggestions the UK election could result in a hung parliament causing sterling to drop 0.6 per cent against the dollar during Asian trading hours.

The 7IM Balanced fund, which was launched 14 years ago, is holding 12 per cent in cash, the highest it has been since just before the EU referendum (12.5 per cent).

Last time the fund held a higher than usual cash level was in August 2015 following China’s currency devaluation, with cash up at 14.5 per cent and prior to that during the 2008 financial crisis when it was at 13.5 per cent.

The lowest cash weighting in the portfolio was in March 2014 at 3 per cent.

In October, 7IM said it had already relatively high levels of cash across all portfolios.

At the time, the firm had decreased its positions in the three leading equity markets of the UK, US and Europe, while increasing exposure to emerging market local currency bonds and US high yield bonds.

7IM deputy chief investment officer Alex Scott suggests the firm is holding on the same strategy.

Scott argues at the moment UK valuations might not fully price in the risks of other falls in sterling and uncertainties over domestic profits.

He says: “We see plenty of flashing amber signals for the UK economy, and risks ahead as Brexit negotiations get underway in earnest, but UK shares have continued to make progress – helped of course by their high exposure to overseas assets.

“In the US, investors are understandably ratcheting back their expectations for what the president can achieve on tax reform, infrastructure spending and deregulation: this puts a sharper focus on valuation, where current market levels leave little margin of safety. This leaves us with clear underweights in both the US and UK, seeing better value in other equity markets around the world, and relatively high cash positions in portfolios.

“This can be uncomfortable in ‘risk on’ markets, but as conviction investors with a focus on delivering target returns over the medium-term, we have to have the courage to do what we believe is right.”