Blue Whale: Cash and Placeholders

Investing Strategies
#1

I was watching this Q&A with Stephen Yiu of Blue Whale on PIWorld when Stephen mentioned something that caught my attention. The fund utilises an MSCI World ETF as a placeholder when the management team wants to invest cash in the market, but doesn’t have any current investment ideas. I guess that means when they have ideas which are not at an acceptable valuation or they feel they are fully allocated in their best ideas.

Is this a good strategy? I think it could be. If an investable idea presents itself at an acceptable valuation independently of the wider market then they can switch from the placeholder to the new investment. If an idea reaches an acceptable valuation as a result of a wider market move downwards, they could make the switch from the placeholder accepting that everything has moved down together. Alternatively they could decide that a wider market downturn is a good time to release cash that they have been keeping out of the market to purchase the new investment and wait for a better opportunity to exit the placeholder.

I do limit the amount of cash that I hold but I don’t often have excess cash that I want to be invested when I’m not seeing any opportunities. It could happen though and putting it into an MSCI World tracker seems like a reasonable temporary home.

Interested in any thoughts on this strategy or other cash management strategies people are using.

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#2

It seems a reasonable idea to me. We know that returns on cash are rubbish and by using the ETF you have a very, very diversified exposure to the markets. Since stock markets can only ever go up ( yeah, right ) over a period of time you should get a better return which will minimise cash drag.

Presumably dealing costs for BW will be miniminal. For PI’s that might make the strategy unviable.

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#3

Hi Stephen,

Thanks for your reply and welcome to the forum.

Yes, good point. Two transactions to get in and out of your placeholder plus your investment buy transaction. So three times your normal transaction fees to get into your final investment. That makes it a much less attractive strategy for PIs than for BW.

I guess viability might depend on the amount available to invest, the length of time spent in the placeholder, wider market conditions vs sentiment towards potential investments, level of cash erosion. Lots of variables to consider with a generally higher level of risk for PIs given the higher fees incurred. It could well be unviable for PIs in many cases and it would certainly require some careful assessment to justify moving out of the safety of staying in cash.

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#4

Hi MIA

For pro investors such as BW, the approach makes sense. I suspect most funds have a mandate (or at least an expectation) to be invested in equities at all times and to not have significant cash on the sidelines. This approach therefore resolves that issue when buying ideas are limited. Also, tracking the wider market higher or lower is not going to hurt the fund’s relative performance, which helps job security.

For PIs, I guess a lot depends on how much cash is held and the likely holding duration. Holding 20% cash for three years probably warrants a tracker substitute. 5% cash for three months perhaps does not. Most bargains occur during wider market selloffs, and investing straight cash at the lows may be easier psychologically than having to sell your temporary tracker position – probably at a loss – first. The approach may also add the dilemma of thinking whether the tracker may actually outperform your intended stock on the rebound.

Maynard

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