Stock Fund Managers Hold Lowest Cash Level Since ’72

U.S. stock mutual fund managers are holding less cash than any time since 1972, an Investment Company Institute report showed Thursday.

That’s a red flag for those who recall what happened the last time funds were so fully invested.

There followed “a painful bear market and it cost a lot of money,” said Seth Glickenhaus, senior partner at Glickenhaus & Co., who has managed other people’s money since the early 1950s.

The Standard & Poor’s 500 index lost almost half its value between January 1973 and October 1974, and then stumbled along in a bear market that lasted another eight years.

At the end of last month, the average stock fund had 4.2% of assets in cash, the lowest level since December 1972, the Investment Company Institute reported.

Don Phillips, president of Morningstar Inc., a mutual fund research firm, noted that a drop in cash levels is a concern because “the more cash fund managers have, the more buying power there is on the sidelines that can drive stocks higher.”

Cash levels have been declining since January 1996, when stock funds had 8.1% of assets in cash, the ICI reported. The average cash position was 5.5% as recently as Jan. 31.

The pace of stock fund buying is declining at the same time cash holdings are dropping, fund companies reported. Fidelity Investments, Vanguard Group, Charles Schwab Corp., T. Rowe Price Associates Inc. and Scudder Kemper Investments Inc. said investors have slowed their new purchases of equity funds in May.

Fidelity, the nation’s largest fund company, said stock fund inflows have fallen to about $500 million in May from almost $2.5 billion in April. Vanguard, the second-biggest fund company, reported that its stock funds attracted a net $2.7 billion, down from a record $4.2 billion in April.

About $6.2 billion has been invested in all stock funds this month, down 77% from April when $26.6 billion went into these funds, according to Trim Tabs Financial Services Inc., a research group that tracks fund flows.

Investments in funds usually slow after April because the bulk of 401(k) retirement plans are established in the first quarter of the year.

“It’s been a pretty dramatic slowdown, though, because the stock market has had some choppy times and investors are nervous,” said Carl Wittnebert, Trim Tabs’ research director.

The S&P; 500 is down about 2.9% since closing at a record 1,130.54 on April 22 amid concern U.S. corporate profit growth is slowing and the economic crisis in Asia is deepening.

Still, the U.S. benchmark stock average is up 13.8% since the start of the year and up about tenfold since the bull market rally started in 1982.

Some analysts say the market environment is much different from the way it was in the mid-1970s and early 1980s and say the low cash holdings aren’t a big concern. Today, inflation and government spending are under control and interest rates are declining, so it’s little wonder cash levels are low, said Robert Froehlich, chief investment strategist at Scudder Kemper in Chicago.

“In this environment, it makes sense to have as much money as you can in the stock market,” Froehlich said. “You get penalized when you’re holding cash.”

Stock fund managers are holding less cash because financial advisors are putting more pressure on them than ever before to be fully invested, Morningstar’s Phillips said.

“A decade ago, stock fund managers raised cash when they thought the market was too high,” Phillips said. “That rarely happens these days.”

Meanwhile, the assets of the fund industry overall have doubled to $5.05 trillion in less than three years and increased by $1 trillion since last June, the ICI reported. The growth is tied to the bull market and the unprecedented appetite for funds among Americans who are saving more for retirement.

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