GMO’s James Montier Is Holding 50% Cash; Three “hellish” Situations

July 11, 2015

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By Mark Melin. Originally published at ValueWalk.

Finding investment value is absurdly difficult, said a leading hedge fund manager, who has since reduced risk exposure to 2008 low levels.

James Montier: Three "hellish" situations he models

Sounding a familiar refrain, James Montier of US asset manager GMO, with $118 billion in client assets, is having difficulty finding values that warrant asset deployments.

‘This is definitely the most difficult time to be an asset allocator. It’s very hard to find value,’ James Montier was reported to have said at a Value Intelligence Conference in Munich, an event hosted by Value Intelligence Advisors (VIA).

James Montier points to 20 percent of the portfolio invested in “liquid assets” which is cash and derivatives and 30 percent invested in fixed income. With a whopping 50 percent not in the stock market – 20 percent in non-equity products is more common – the fund manager has a reason for this diversification model.

He cites three primary “hellish” market situations. There is a “stable hell” where rates stay low for a long period of time and volatility, and their “entry opportunities,” are minimal. Then there is “something near purgatory” in-between a low interest rate environment and a rising rate environment. And his third economic model is an “unstable hell” where uncertainty reigns supreme.

How do you invest in a "hellish" market environment?

It is in this environment that James Montier assesses his cash position and looks for an opportunity to strike. “Investors are constantly asking me how long I’m going to keep the cash position and what is going to be the ultimate trigger for reducing,” he said. “I can’t say that, it does worry me if we are in this stable hell environment but at the moment, I think it’s best to stand a bit and hold onto some dry powder.”

While 50 percent in cash might seem like a significant amount of dry powder, there have been periods where the fund manager had even a higher cash level: right before the last crash. “In 2007 and 2008 we had about 80% of the fund in non-risky assets. This has been the first time since that we have had over 50% in very liquid assets,” he said.

James Montier recently cut loose big U.S. names such as Proctor & Gamble and Microsoft Corporation (NASDAQ:MSFT), citing valuation concerns.