the groups shift money from equities over past six months in favour of more liquid ASSETS
Investment trusts have increased cash weightings over the past six months, pulling money out of equities in favour of more liquid assets.
Of the 37 sectors in the investment trust universe, 19 saw an increase in the weighted average proportion of cash held in the component portfolios over the six months to 24 March, according to HSBC investment trust data tables for NAV performance, gearing and discounts.
Analysis by Investment Week has found that of the 19 trust sectors where cash weightings increased, 11 also saw a reduction in the weighted average allocation to equities, suggesting managers are actively selling equity holdings to raise cash.
These sectors were Global Fund of Funds, UK Income Growth, Aim, Europe Smaller Companies, US Smaller Companies, Japan Smaller Companies, Emerging Markets Global, Emerging Markets Emerging Europe Emerging Markets Latin America, Emerging Markets Single Country and Hedge Funds.
'As markets have come off, a lot of boards with gearing in place have used cash to offset the gearing, which is rising in inverse proportion to the equity portfolio,' said JPMorgan Fleming head of specialist pooled funds David Barron.
Concurrently, 10 of the 19 sectors where cash weightings increased there was a rise in gross gearing levels, which suggests the higher cash holdings are required to offset the impact of falling equity prices on gearing levels.
Investment trust gearing normally consists of long-dated debentures, which cannot be repaid easily, particularly since they were in most cases taken out in times of much higher interest rates. This means that any repayment incurs a substantial penalty in order to compensate the lender for the loss of income in the current climate of low interest rates.
Trusts generally have covenants with their lenders restricting the ratio of debt to equity holdings, which means when falling prices erode the value of the asset portfolio, trust managers must either repay some of the debt in order to remain within their covenant limits, or hold cash to reduce the gross gearing position.
Nick Greenwood, head of investment trusts with boutique fund manager Iimia, said: 'People have felt uncomfortable with large levels of gearing and have felt cautious.'
Some of the rise in cash weightings could be attributed to a fall in asset prices over the past six months, he said, which would increase the relative weighting of cash in the portfolio.
'There are technical factors affecting the cash weightings, as the capital structure has gone out of shape due to the dramatic moves in the market over the past two to three years, but the nervousness of boards is adding to that,' he added.
'Gearing is out of fashion at the moment, although on a medium-term view, people ought to be geared.'
Only five of the trust sectors where cash weightings increased also saw a rise in equity weightings, while another five trust sectors where cash weightings were falling also saw a rise in the proportion of equity held in member trusts.
Sectors where cash was being reduced in favour of increased equity exposure were Japan-General, Specialist-Biotechnology/Pharmaceuticals, Specialist-Technology, Private Equity-Direct and Private Equity-Fund of Funds.
This suggests managers in these sectors may be adding to their exposure to their respective markets, although three of the sectors also saw an increase in net asset value over the period, which could account for some of the rise in the percentage of net assets being held in equity.
HSBC investment trust analyst Paul Locke said private equity is currently offering trust managers significant opportunities.
'People are running away from the private equity scene, which is reflected in the wide discounts. But for private equity funds this is a great time to invest because you can pick up distressed assets at incredible prices, and if you're a long-term investor and you can pick up trusts buying these assets on discounts of 40% or more, now is the time to buy,' he said.
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