Cash: 'Financial oxygen' or a drag on returns?

Despite the relentless rise of US equity markets since the financial crisis, the country's most famous investor, Warren Buffett, has stuck to his decades-long discipline of holding a large cash pile for a rainy day.

In his latest annual letter to investors, Buffett made a point of emphasising his company’s conservative approach, naming its substantial cash holdings as one of the three pillars of his success over the past 50 years. He wrote: “At a healthy business, cash is sometimes thought of as something to be minimised – as an unproductive asset that acts as a drag on such markers as return on equity. “Cash, though, is to a business as oxygen is to an individual – never thought about when it is present, the only thing in mind when it is absent.” As equity managers are aware, maintaining high...