Mutuals’ Cash at 2-Year High; Could Help Fuel a Stock Rally

Stock mutual fund managers are looking much more worried about the market’s next move: They boosted cash levels in their portfolios to an average of 6% of total assets in October, a two-year high, new data show.

Those cash levels, combined with soaring money market fund assets in recent weeks, suggest that there is plenty of money on the sidelines that could help fuel a stock rally--if and when one arrives.

The Investment Company Institute, the funds’ chief trade group, said Wednesday that stock funds continued to attract investors’ dollars in October, despite the continuing plunge in technology stocks.

Stock funds’ overall net cash inflow was $19.1 billion in October, up from $17.3 billion in September, ICI said.

As investors poured money in, however, many fund managers held on to that cash rather than putting it to work in stocks. That pushed the average fund’s cash holdings as a percentage of total assets to 6% at the end of October from 5.3% at the end of September.

Funds’ average cash percentage hasn’t been above 6% since September 1998, when it hit 6.3%. That was when markets worldwide were hammered by the Russian economic crisis and the collapse of the Long Term Capital Management hedge fund.

Rising cash levels at equity funds can be rocket fuel if the stock market snaps out of its funk, because managers would then rush to put some of that money to work for fear of being left behind.

Indeed, that’s what happened in the fourth quarter of 1998.

One analyst said fund managers may be reluctant to deploy their cash this time around until they are certain they have momentum on their side.

“What are portfolio managers waiting for before they start investing?” wrote Charles Biderman, president of TrimTabs.com, a Santa Rosa, Calif.-based firm that tracks industry trends, in a newsletter Wednesday. “One guess: a good-size two- or three-day rally where the overall market goes up by at least 6% to 9%. When [managers] guess that the rebound could top 10%, the lemmings should stampede.”

Still, fund cash levels are far below historical peaks. In October 1990, at the bottom of that year’s bear market, cash reached 12.9% of fund assets.

Meanwhile, money market funds--a safe haven in times of stock turmoil--are on pace to take in a record net $55 billion to $60 billion in November, said Peter Crane, managing editor of Imoneynet.com. The funds had raked in $26.1 billion in October, ICI’s report said.

Money market fund assets now stand at a record $1.8 trillion.

“Whenever [money funds are] at record levels, that always tends to be a plus for stocks,” Crane said. “There is just a lot of cash available for investment.”

But most of the cash coming into money funds in recent weeks has been institutional, Crane noted--meaning that it comes from large investors such as pension funds and businesses rather than Joe and Jane Investor.

In the stock market, “Retail investors are not running for the exits, although institutional managers have been,” Crane said.

In fact, TrimTabs.com estimates that stock funds could see a net inflow of about $12 billion for this month, even with the Nasdaq composite down another 20% so far. Several major fund companies confirmed Wednesday that their flows are positive.

Vanguard Group, Fidelity Investments, T. Rowe Price Associates and Charles Schwab said their equity funds were on track for overall net inflows this month.

But Janus Capital, which has suffered net outflows in recent months as performance has turned cold and half of its 16 funds have closed to new investors, declined to comment on its November sales.

While most firms said investors continue to favor growth funds over value funds, Vanguard--whose customers tend to be more value-oriented by nature--said conservative offerings such as Growth & Income and the rejuvenated Windsor, which has risen about 5% year-to-date, are among its best-sellers this month.

Vanguard also said money market inflows are up dramatically, running 25% to 30% higher than they were in October.

In October, despite the tech-stock slump, investors pumped a net $7.2 billion into aggressive-growth stock funds, up from $5.9 billion in September, ICI said. Those funds tend to be big owners of tech issues.

By contrast, more conservative growth-and-income funds had a net outflow of $328 million in October.

ICI also said stock funds that invest abroad saw a net outflow of $154 million in October, compared with an inflow of $1.5 billion in September. Several fund companies said investors have continued to shy away from foreign funds this month.

Meanwhile, investors continued to pull money out of bond funds in October--even though many bond funds have generated strong returns this year. Taxable bond funds had a net outflow of $2.9 billion, while municipal bond funds had an outflow of $272 million.

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Fearful Funds

The average stock mutual fund held 6% of its assets in cash at the end of October, suggesting that fund managers have become more fearful of being fully invested in stocks.

Cash holdings as a percentage of total fund assets at year-end of each year and latest:

October 2000: 6%

Source: Investment Company Institute