As we get into the busy fall season I wanted to offer an update on portfolio positioning and our views on the market.
A large macro risk we have discussed previously, the credit and property bubble in China, deserved further investigation over the summer. We sent Dan, our financials analyst, to China and Hong Kong for a week to see if he could untangle the financing webs and help us understand how close we are to a crisis moment. It became clear that, for now, the government has control over the situation. At some point they will have to take their medicine and correct the imbalances. Over the last two months we have seen targeted liquidity injections and stimulus, which has temporarily stabilized growth and financing markets. We will be watching the property markets for any indication they are losing control.
With more comfort around this risk, and continued rolling sector-corrections through equity markets, we were able to once again find companies that met our risk-reward framework. Across most portfolios cash levels have come down, from the 20% range to 10-12%. The only portfolio where cash didn’t change significantly was Cambridge Canadian Asset Allocation Corporate Class, where our team has decided to hold cash instead of fixed-income securities, with the risk-reward unfavourable across the asset class. Our asset allocation team will provide a follow-up blog on fixed-income markets, interest rates and how the funds will evolve as these factors change.
When looking across our holdings, our skew towards quality and core names has increased. At this point in the economic cycle, and with where valuations are, we are focused on business models and management teams that can create value in a low but stable growth environment. Pricing power and business flexibility is at a premium in this regard.
Over the next few months we have no idea what the market will do. Economic growth seems fine, valuations seem fair and volatility seems unsustainably low. This is why our focus continues to be on internal value creation potential of the companies we own, and holding cash in our portfolios to take advantage of volatility if it does come back again.
We know we have been relatively silent through the summer (there wasn’t a lot to talk about!), but the conversation is going to pick up from here. As mentioned, expect a blog on our rate strategy, a post by Greg Dean on the recently launched Cambridge Growth Companies Fund, and company updates from conferences we are attending. And as always, feel free to ask questions or provide comments. We really want to keep this a conversation.