Some Stock Mutual Funds Offer the Security of Cash
For all sorts of good reasons, a lot of investors are antsy about U.S. stocks’ prospects in the near term. But many of those same investors would, understandably, be even antsier about being out of the market entirely.
If that describes you, there may be a reasonable solution: stock mutual funds that are holding a significant chunk of their assets in “cash.”
There aren’t many of them, but they include such highly rated funds as Clipper Fund and Weitz Value.
For the fund industry overall, cash is basically trash: Industry-wide data show that the average stock fund had just 4.2% of its assets in cash at April 30, the lowest percentage since December 1972.
Keeping a low cash balance has been by far the best strategy for domestic stock funds since 1994, as Wall Street has soared. Funds that have stayed fully invested in stocks have generally recorded stellar returns.
By contrast, funds that kept too much of their powder dry have mostly suffered, earning money-market returns of 5% or less on their cash assets while the stock market has rocketed 20% to 30% a year.
Consider the case of the Brandywine Fund of Wilmington, Del. The $7.5-billion fund had two-thirds of its assets in cash at the start of the year, as lead manager Foster Friess worried that Asia’s economic mess would have a worsening effect on the U.S. economy.
Wrong call. The U.S. market soared in the first quarter, and Brandywine was left behind. Year-to-date, while the Dow Jones industrials are up 12%, Brandywine is down 2.6%--even though the managers have since jumped back into stocks in a big way, cutting the cash balance to 8% of assets by mid-May.
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Still, everybody knows (or should) that the stock market’s hot returns since 1994 won’t keep up forever. And with most U.S. fund managers nearly fully invested now, it begs the question: If the market were to take a tumble--pushing many stocks into bargain territory--how many fund managers are in a position to buy much, with so little cash on hand?
Ideally, a market slide would be accompanied by a surge of new cash into the funds from individual investors. But that’s not how it usually works: In times of market turmoil, individuals’ first reaction is to slow their fund purchases. Buying tends to pick up only after investors see the market begin to rise again.
Fund managers could, of course, sell some stocks to buy others in a market downturn, but that could work out to merely offsetting losses with gains.
The bottom line: If you want to be ready to pounce on lower stock prices, when they occur, you need cash. Some funds can get it by borrowing, but that will cost them a share of any returns they generate.
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Who’s got cash among stock funds today? Here are a few ideas:
* Beverly Hills-based Clipper Fund ([800] 776-5033) and Omaha-based Weitz Value ([800] 232-4161) both are no-load funds that strictly seek undervalued stocks. Both have beaten the average stock fund over the last five years.
Clipper, which typically targets big-name stocks, now has 44% of its $950-million asset base in cash and shorter-term Treasury notes. Its stock holdings include mortgage giants Fannie Mae and Freddie Mac, but the only stock it has bought aggressively this year is cigarette and food giant Philip Morris, says co-manager Michael Sandler.
Weitz Value, which has long had a significant stake in cable TV, telecom and financial stocks, now has 25% of its $500 million in assets in cash or shorter-term Treasuries.
Another no-load idea: Chicago-based Oakmark Fund ([800] 625-6275), a stellar long-term performer among big-stock funds. It had 12% of assets in cash as of March.
* “Balanced” or “asset allocation” funds--which generally own a mix of stocks, bonds and cash--are another idea. The no-load Vanguard Asset Allocation Fund ([800] 662-7447) had 50% of assets in stocks, 40% in bonds and 10% in cash at April 30. Its managers can move more into stocks if they see bargains emerge. Ditto for the socially conscious Pax World Fund ([800] 767-1729), also no load. It has about 47% of its $676 million in assets in cash and short-term bonds.
The fund, whose long-time manager Tony Brown retired in April, now is co-managed by Robert Collin and Christopher Brown, who own such names as AirTouch and Gap Inc. but are willing to wait for better prices to invest more fully.
