By Mark Jewell
AP Personal Finance Writer
BOSTON (AP) -- Too much cash. It sounds like a nice problem to have.
It is, unless you're a mutual fund manager sitting on client money while the stock market is rising. Stocks bloom, while a big piece of the fund manager's portfolio gathers moss in low-yielding short-term bonds, money-market funds, or just plain old cash.
Investors scanning through a quarterly report may be puzzled to learn a fund is holding lots of cash. Why pay a money manager fees to, in essence, keep a sizable chunk of your cash under their mattress?
Yet many top fund managers routinely keep 10 percent or more out of the market and on the sidelines.
They may have good reasons for doing so. One common rationale: If a favored stock falls in price, a fund manager with a cash cushion can draw on those reserves to snap up the stock quickly.
"To be fully invested today is to assume there will be no better deals tomorrow," says Mark Travis, co-manager of the Intrepid Small Cap Fund. "And I've never operated under that assumption."
But cash can become a lead weight on a portfolio in a rising market like this one. The Standard & Poor's 500 stock index is up 16 percent since a two-month rally began in September. All told, the market is up 9 percent for the year.
Consider the year-to-date numbers for Intrepid Small Cap and two other currently cash-heavy funds, all with 5-star ratings from Morningstar because of superior long-term returns:
--Forester Value is up 4 percent, lagging 99 percent of its peers specializing in large value stocks.
--Intrepid Small Cap is up nearly 16 percent, yet trails nearly 80 percent of its small-blend peers. The fund category is faring better than most because small company stocks are performing well.
--Osterweis is up nearly 8.5 percent, lagging 95 percent of its mid-cap blend peers.
Each of the managers acknowledged a key reason they're lagging is their cash position: about 19 percent at Forester Value and Intrepid Small Cap at the end of September; and nearly 16 percent at Osterweis.
Those cash positions are around six times the average for all U.S. stock funds, which stood at 3 percent at the end of September, according to Morningstar.
Despite their recent back-of-the-pack results, managers at these three funds don't have regrets about keeping so much money on the sidelines. Their explanations help illustrate why investors shouldn't necessarily dismiss funds that are cash-heavy in a rising market:
--Tom Forester, Forester Value Fund (FVALX):
When Forester is nervous about stocks, there's good reason to pay attention. His fund was the only U.S. stock fund to finish 2008 with a gain -- it essentially broke even, up 0.4 percent -- amid a market collapse that caused nearly every other fund to post double-digit losses. Many of his stocks were defensive picks that avoided major trouble. He also kept as much as 30 percent of his fund in cash that year.
At 19 percent cash -- a level he calls moderate -- Forester isn't as pessimistic as he was entering 2008. But he frets about the Federal Reserve's latest move: printing enough money to buy around $75 billion in Treasury bonds each month for eight months. The goal is to boost the economy by forcing long-term interest rates down.
With short-term rates already near zero, Forester worries the Fed's move will do little to invigorate an economy that remains unsteady despite several rounds of stimulus. So he thinks a big cash cushion will protect his investors.
"The Fed is basically gambling," Forester says. "They're doing this because they feel they don't have any other choice. And that alone tells you there is a fair amount of risk."
--Mark Travis, co-manager, Intrepid Small Cap (ICMAX):
A fund focusing on a narrow area of the market, such as small company stocks, often has fewer options. And Intrepid Small Cap holds a concentrated portfolio of 50 stocks, with the top 10 holdings making up one-third of the fund's $630 million in assets.
Travis likes to keep a cash cushion so he can pounce on stocks he's looking to buy once they're priced affordably. Without cash, he'd have to sell or reduce holdings to free up money for a purchase.
The fund was nearly 39 percent cash during the worst of the financial crisis in September 2008. Months later, Travis started buying stocks at fire-sale prices. The fund used two-thirds of its available cash to buy bargain stocks, among them Pan American Silver when it was around $10 a share.
Now, trading above $37, the stock remains among Intrepid Small Cap's top holdings. It's one of the reasons the fund is in the top 1 percent among its peers over the past three and five years.
Travis has heard plenty of complaints from clients upset about the fund's tendency to hold large cash stakes, even when stocks are rising. But after 2008, when the fund fell just 7 percent compared with S&P 500's 37 percent, "I don't hear about that much any longer," Travis says.
--John Osterweis, co-manager, Osterweis Fund (OSTFX):
The fund held as much as half its portfolio in cash in 2008, and ended the year down 29 percent, better than about nine out of 10 of its peers.
Osterweis doesn't see the fund's current 16 percent cash position as extreme.
"The economy could fairly easily roll over into a double-dip recession," he says, calling the range of possible outcomes over the next couple years "about as wide as we've ever seen."
With so much uncertainty, his fund's cash stake provides flexibility. And it's worth remembering how unkind math can be when markets sour. If your stocks lose 50 percent in value, you'll need a 100 percent gain -- not 50 percent -- to get back to where you started.
"My goal isn't to beat the market every month," Osterweis says. "I'm willing to sacrifice a little bit of short-term return to make sure I'm protected down the road."
Published: Mon, Nov 15, 2010
