Here is a quick update on portfolio positioning as we head into the busy fall season:
We have made a tactical asset allocation call to raise cash in Cambridge Asset Allocation Corporate Class (20% to 30% cash, all from equities). At the same time, our cash positions in the Cambridge Canadian Growth Companies and Cambridge Canadian Equity funds have increased to the high teens. There are a few drivers for this move.
First, from a bottom-up perspective we are not finding the opportunities in the market we saw a year or two ago. This does not mean we have stopped looking; the list of potential buys is growing while the risk-reward does not yet justify purchasing them in the funds.
Second, while we have seen very good performance for the year-to-date in non-resource sectors (both Canada and the U.S.), it has been driven by multiple expansion rather than fundamental improvement. We always talk about looking for sustainable growth in the companies in which we invest and this is a similar concept when looking at the market as a whole: A higher valuation is not a sustainable source of returns for equity investors. (Watch for a follow-up blog discussing this topic.)
Finally, the combination of higher interest rates and oil prices increases the risk of an economic slowdown in the near term. Oil prices have an impact on consumer spending and trade, potential for war slows business decision making and, with the spike in interest rates, capital expenditures (on homes, cars, new equipment, etc.) have to be re-evaluated. So while higher absolute rates likely won’t detail the recovery in the longer term, the speed of the increase coupled with rising oil prices make us more cautious in the near term.
When you add it up, the lack of bottom-up opportunities, performance driven by valuation expansion and the potential for a slowdown in economic activity have led to rising cash positions across our funds. We believe it is prudent to reduce risk while preparing to take advantage of opportunities when they do arise.