Clipper Puts Stock in Cash Cushion

“The stock market is overvalued, having passed all the valuation yardsticks known to economic man,” said James Gipson, manager of the Clipper Fund.

Gipson, whose large-stock mutual fund began selling stocks about a year before the market crash of October 1987, is once again putting his investors’ money where his mouth is.

Clipper has about 41% of its assets in cash, as of Tuesday. The last time the fund had so much money outside the stock market was autumn 1987.

Gipson and co-manager Michael Sandler started selling stocks and raising cash about two years ago, as price-to-earnings and price-to-book value ratios started rising to what are today historic highs.

“We were early selling stocks in ‘87, and we seem to be early this time as well,” Gipson said.

The $950-million Clipper Fund’s hefty cash position has crimped returns. The fund was up 6.32% this year, as of Monday, ranking No. 457 of 925 “growth” stock funds tracked by Bloomberg Fund Performance. (The fund is labeled growth by Bloomberg even though it adheres to more of a value-oriented investment style.) The benchmark Standard & Poor’s 500 Index, by contrast, rose 14.8% in the same period.

What this cash position has done for investors, however, is provide a cushion. During the last month, with markets around the world slumping, the Clipper Fund, while falling 2.14%, ranked No. 12 of 1,009 growth funds tracked by Bloomberg.

But the fund’s sizable cash position means a lot of people who own Clipper Fund shares are about to get hit with a surprise--a whopping tax bill, a tribute to all the profits from stocks the fund sold.

The fund is planning a taxable distribution of about $10.76 a share on Monday--a windfall that many investors would rather not see. The distribution is almost four times what the fund normally distributes in a year.

“The distribution is large, but it won’t affect many of our investors who own shares in tax-free accounts,” Gipson said. “For investors in taxable accounts, virtually all the distribution is in the form of long-term taxable gains, which are taxed at lower rates than short-term gains.”

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A Fast Clip

The Clipper Fund has outperformed other large-company value funds as well as the average general U.S. equity fund in recent years, according to data compiled by Morningstar through Friday:

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Fund 1-yr. return 5-yr. return* Clipper Fund +15.0% +19.6% Avg. large value +6.6 +16.1 Avgerage domestic equity +6.4 +15.0

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*Annualized

Source: Morningstar