See if Your Manager Is Taking Refuge in Cash

Before you put your money into a stock mutual fund, it may pay to inquire how its managers feel about cash.

“Cash,” in this context, refers to Treasury bills and other short-term money market securities that a fund uses as a parking place for assets it hasn’t committed to the stock market.

A small cash reserve is pretty much standard in any stock fund, representing money just received from investors or the proceeds of stocks that the portfolio manager has just sold.

But beyond that lies a sharp division between managers who build up cash as a defensive measure when they feel the stock market is risky, and those who believe a stock fund belongs in stocks, all the way, all the time.

“People want a mutual fund to be invested,” says Art Bonnel, whose $13-million Bonnel Growth fund had only a few thousand dollars in cash at last report.

“We’re fully invested at all times,” concurs Tom Regner, chief equity portfolio strategist at Kemper mutual funds in Chicago. “You cannot time the markets, so don’t bother.”

Not everybody feels that way. A whole class of funds, known as asset allocation funds, shifts money among stocks, bonds and cash as a central part of its mission.

Furthermore, a good many funds that bill themselves as “stock” funds practice a form of asset allocation. The Value Line mutual fund survey recently tallied 34 “stock” funds that had 25% or more of their assets in cash as of the end of 1994.

The list included some small, specialized funds--but also several large, established ones in such big-name families as Fidelity, Dreyfus, Founders, and Franklin-Templeton.

“It would be stretching it to call these funds ‘stock funds,’ at that point in time at least,” Value Line observed. “Perhaps ‘stock and cash funds’ would be more appropriate.”

The earliest image of stock fund managers was as do-everything professionals who would try to pick the right stocks in good times, and circle the wagons by moving into cash when market conditions turned hostile.

But in the eyes of the modern fully invested school, that assignment is too much to ask of anybody--it’s a full-time job just trying to find good stocks.

That leaves fund investors, or their financial advisers, free to allocate assets among the different classes of investments as they see fit, by spreading their money among a variety of funds.

After all, managers of the fully invested school say, asset allocation often comes down to a matter of personal circumstance and preference--involving such things as the individual investor’s age and goals in life.

For their part, quite a few money managers who do vary their cash reserve ratios a lot say they don’t arrive at conscious decisions to “raise cash,” in Wall Street parlance.

Instead, they say, cash positions accumulate in their portfolios when their search for attractively priced stocks fails to turn up many suitable candidates.

That approach may be fine, Value Line says, as long as you are aware that a fund operates that way.

But it may present a problem if you have worked out a disciplined asset-allocation system of your own, and are relying on a given stock fund to give you exposure to the stock market, when in fact it might be 30% or 40%, or even more, in cash.

You can monitor a fund’s cash policy, as well as its overall investment style, in advisory services such as Value Line and Morningstar Mutual Funds, or by reading a fund’s own literature and talking to its representatives.

“Investors who are serious about allocating their investments carefully should periodically find out how, in fact, their mutual funds are deploying assets,” Value Line concludes.

“If you find that the manager is actually trying to time the market by raising significant amounts of cash, then you have to decide to tolerate a less precise asset allocation, or opt for a fund that is more dedicated to staying fully invested.”