Cash has held more sparkle for European institutional investors in recent months, as the turmoil on global markets forces a rethink of mid-term strategies.

Bank of Ireland Asset Management (BIAM), which promotes itself as a specialist global equities firm, has also seen cash holdings rise. About 10-15% is now in cash or cash equivalents and only two-thirds has been invested in equities, which is low for us and low for the industry," says managing director Francis Ellison in London.

"We've tended to go for bonds, or exchequer notes and treasury bills," says senior portfolio manager Graham Brooks at BIAM. The trend has been reinforced, in his view, by a sharp reduction in interest rates - the rate has tumbled from 5.8% to 3.6% - as Ireland gears up for the euro. Brooks expects the popularity of bonds to intensify, as Irish pensioners seek a greater degree of protection for their money. "We're cautious about wider cash, for example, when dealing with corporate money. You never know what risks are around the corner so we tend to go for blue chip, gilt-edged instruments."

Even houses that traditionally take a cautious view on cash have been tempted by the turmoil on the global equities market to make a change. ABN AMRO's global investment committee decided at the end of September to up the percentage of balanced mandates held as cash to 5%, from zero. "It's basically a return to our benchmark, however," points out Mark Lammerts of ABN AMRO Asset Management in Amsterdam. "This runs parallel to the cancellation of overweighting equities in that benchmark. Our overall policy is to be fully invested: we don't try to beat benchmarks by taking bets on cash."

In some parts of Europe, the increase in cash holdings may have peaked already. Fimagest of France reports a marked move to cash in August and September. "But it definitely doesn't amount to a long-term trend," says international bond manager Thierry Kreno. "The French-German 10-year bond rate moved from 4.80 to 3.80% over the summer, but this didn't last. When shifting out of equities, we generally favour bonds over cash."

The Nordic region has seen a lot of cash in the past two years, as many companies held on to excess amounts, but the allure could already be waning. "We've been running a lot of short-term liquidity portfolios," says Peter Preisler, senior vice-president of Danske Capital Management.

"Clients who have cash - because, for example, they have a certain cash-flow requirement for the next six to 12 months - have been seeking an alternative to bank deposits because of the decline in short-term interest rates." He has tended to favour the derivative and even repo markets, although he finds a lot of inexperienced investors are cautious. "Investors want to measure success against a benchmark, they go for safety rather than performance."

Adds Preisler: "If anything, we are now going back on cash. We've been underweight on equities, recently, and are now moving back to neutral. History shows that people who go short-sighted at times of volatility - such as 1987 or the Gulf War - emerge as losers, but longer-term investors fare alright."

But not all managers have gone over to cash. "The industry has seen a staged flight from equities, with bonds looking a much more solid bet in the light of Russian and Far Eastern concerns," says Rod Cummins of Hill Samuel Asset Management in London. "It's a process that's been going on for between six months to three years, depending on the individual house view.

"Our asset allocation policy is defensive, whilst financial risks and volatility remain at extreme levels. Currently we have a small overweight position in bonds, underweight cash and are neutral in equities. Our central caise supports an overweight position in equities and this is our likely position for 1999."

He adds: "Pension fund benchmarks have seen an increased cash holding in the light of recent equity market turmoil." This increase in cash has not been triggered by demand from clients: they have generally been happy to let asset managers make their own judgments about allocation. "We've tended to react by adding value through UK and overseas bonds."

Danske Capital Markets has, however, noted more of a predilection for investors to seek to break balanced mandates. "They want more control over their portfolio, or to hire a specialist on the equity side, but we have not yet seen this happening on the cash side."

"We find clients with balanced mandates are generally happy for their assets to be run as one portfolio," says Cummins of Hill Samuel. "Clients will always seek out houses with a record of delivering fixed interest services more efficiently, but we don't see a demand for cash to be managed separately." Kreno of Fimagest does not expect his clients with balanced portfolios to demand a split in cash management either. "It's been a trend in the US, where houses tend to be ex-tremely specialised across all divisions including equities, but I do not see it growing to any great extent in Europe."

Lammerts of ABN AMRO is unsure whether cash will become more of a commodity than it already is. "It is much harder to add significant value in cash than in equities or fixed in-come. A specialist manager could possibly outperform its benchmark but the absolute benefit will be smaller. The question is whether you would be able to make up for high fees." He does see a big future for liquidity fund structures which invest in 30 to 60-day maturities, but offer daily liquidity, which is already popular in the US.

At BIAM, however, Brooks says he feels that cash will probably come to be regarded as a separate asset class "with-in three or four years, although it will always be a small part of a portfolio".

Fimagest thinks there are limits to the extent to which cash services will internationalise. "Cash is the risk-free portion for an institutional investor: we mostly prefer to keep cash in the domestic currency because there is less risk."

Most fund managers are bullish about the impact of the euro, saying that it has already been factored in on markets. Hill Samuel, however, is among the many asset managers that believe it will make cash management more international. "The euro may well tempt clients to look for more fixed-interest investments. It's very realistic to expect that pension funds will increasingly be managed on a pan-European basis.""