Q3 Twitter “Smart Money” Survey: Cash is King

By David Schawel, CFA, Economic Musings

As Q3 2013 begins and markets remain volatile, I decided to reach out to a number of market participants to get their thoughts on this upcoming quarter.

Instead of asking, what will the S&P do, or where will the 10yr end up, I posed a very different hypothetical question:

“Pretend you have the choice of owning the S&P 500, the 10yr UST, or cash for the entire 3Q.  You may not rebalance, and must hold for the entire quarter.  You can hold “3 units”, so you can choose to hold 3 S&P, 3 Cash, or any combination that adds up to three.”

The 20 participants I asked are what I would consider “Smart Money” and come from a broad range of backgrounds in the money management universe.

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Results: The results were somewhat surprising to me.  All else equal I was surprised that cash was the highest allocation despite the recent volatility.  Given the recent selloff in the bond market, I was surprised that allocation to 10yr UST’s was nearly identical to Spoos.

Although there are a lot of shortcomings to this survey, I thought it sheds some interesting light on what various money managers are thinking as we head into 3Q.

David Schawel

Economic Musings was founded by David Schawel. David is a husband and father of two living in Raleigh/Durham NC. He currently works as a fixed income portfolio manager. He spent time in NYC in both investment banking and equity research. He is a current CFA charterholder.

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Comments

  1. Simply taking cash profits from the run up in risk assets(stocks) and waiting to deploy in a higher rate bond environment.

  2. The survey is disappointingly balanced. I was hoping it would be heavily skewed in one direction so we contrarians could take the other side :)

    But the high cash allocation is interesting. I guess it depends on how one defines risk. If the risk is capital loss, then 35% cash is prudent. But if the risk is underperforming a typical 60/40 (stocks/bonds) benchmark, then 35% cash is extremely risky.

  3. Somewhat misleading headline, or at least overstated: Cash winning by a single vote out of 60 is not even a majority, much less an absolutist ruler. Cash obviously is the plurality choice, but you could also focus on 85% of respondents wanting at least some S&P exposure vs. 75% for cash and only 65% for UST.

  4. Such a crap shoot. Who can predict the future 3 mos hence, let alone have told us where we’d be today 3 mos ago? The Fed makes a surprise announcement or political unrest breaks out in a strategic global region, and all bets are off. These people are very intelligent (much more than I am) and are compensated very well for making forecasts, but what is it – 80% of portfolio managers underperorm the index their fund is comparable to? I don’t know how they can do it for a living.

  5. Interesting that the only participant willing to make a 100% bet is a Govt Bond Trader, and that bet is all cash.

    Or one could surmise that 15 of 20 participants are holding at least some cash in the hope that there will be greater clarity in the markets by the end of Q3, and are willing to pay the price for that waiting. But maybe the price is not so high after all. I can easily envision another one or two months of volatility in both stocks and bonds, but at the end neither going very far from where they are now. So maybe the cost of holding some cash is judged to be worth it, if in Q4 you can make a larger but lower risk bet.

  6. It doesn’t matter how smart the person is, making predictions is no better than a coin flip. It is interesting however that my short term tactical asset allocation model has me in 66 percent cash. But I’d never say that’s where I’d be for the next 3-6 months. Nobody knows, which is why we need models more than pundits.