QUARTERLY STOCK MUTUAL FUND REVIEW : Stock Funds’ Cash Assets Bear Scrutiny in a Down Market

Before you sell your stock fund in fear of a bear market, find out if the manager has already done some selling for you.

Fund managers have varying degrees of flexibility with their portfolios. Some always stay fully invested in stocks, which means they get a big lift in bull markets. But a fully invested fund also is likely to plummet sharply in a bear market. By contrast, a fund manager who can shift a large part of the portfolio to “cash” in a dicey market may be able to insulate his shareholders from huge declines.

Some mutual fund companies stay fully invested by charter. The La Jolla-based Pacific Horizon Aggressive Growth fund, for example, rarely has more than 5% of its assets in cash. As money comes in, it’s put to work in stocks. Likewise, the Twentieth Century funds in Kansas City also tend to stay fully invested, no matter what the market outlook.

Most stock funds allow their managers more leeway. Some can hold as much as 50% of their assets in cash if they believe the market is headed for a fall, or if they simply can’t find enough attractive stocks to own. The average stock fund had 8.9% of assets in cash at the end of February, the most recent figure available, according to the fund industry’s chief trade group.

The Denver-based Janus Fund, one of the top-performing growth stock funds of the last 15 years, now has 29% of its assets in cash. Manager Jim Craig has been wary of the stock market’s relatively high prices for some time, and has preferred to wait for better opportunities.

In the first quarter, Janus Fund dropped 2.6%, while the Pacific Horizon Aggressive Growth fund tumbled 8.6%.

If you don’t know your fund’s cash position, call and ask. Though large cash holdings may give many fund owners comfort, remember: A manager who lurches between heavy cash and low cash is a market timer. If done well, market-timing can enhance shareholders’ returns.

But timing is a tough game, and the risk is that an underinvested fund will miss out on big gains if the market skyrockets before the fund manager can pump his cash hoard back into stocks.