The Wall Street Journal-20080202-Mutual-Fund Skippers Put Cash to Work

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Mutual-Fund Skippers Put Cash to Work

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The market's recent volatility has unnerved many investors, but for one group, it is turning into a shopping spree: Mutual-fund managers who had been sitting on piles of cash last year are starting to act.

Yacktman Fund is now 10% in cash, down from 26% in early 2007, and First Eagle U.S. Value Fund has cut its cash hoard by half to about 16%, according to the fund's latest filing. Three funds from Third Avenue Management also are down to 10% or so in cash, having been in the mid-20s previously.

"It's the gigantic after-Christmas sale," says David Winters, manager of Wintergreen Fund. His cash pile is down to 11%, according to the fund's most recent end-of-year filings, from 25% a year earlier.

Managers like these aim to buy only when companies are selling cheaply based on factors such as earnings potential, and would rather hold cash if they can't find good deals. That was the case in the markets until last year, which caused the managers' cash positions to build up. But the stock-market volatility since the middle of 2007 has opened some possibilities for them.

The managers are looking at companies in some of the sectors that have sold off in recent months: financial firms, retailers and even some housing-related companies. But instead of buying the sectors broadly, they are being selective, looking for ones with strong balance sheets that appear poised to benefit over the next few years.

They also aren't spending all their cash just yet, because they expect markets may go down further. "We will insist on much lower prices to be fully committed," says Jean-Marie Eveillard, portfolio manager of First Eagle U.S. Value Fund. He says this crisis is likely to be longer and "more painful" than previous financial crises, thanks to "acrobatics of the speculators."

In recent months, he has been dabbling in some financial-sector names. For instance, he added a small position in credit-card company American Express, whose stock is down nearly 15% over the past year amid worries that more clients won't be able to make their credit-card payments. While Mr. Eveillard is still assessing what kind of damage the company might end up with, he says the stock had become too cheap to ignore.

First Eagle U.S. Value Fund has returned nearly 14% annualized over the past five years through Jan. 31, according to Morningstar.

Mr. Eveillard also likes asset-management and mutual-fund companies, which have high margins and cash flows. While these aren't dirt-cheap, he says they have become more reasonable. He says the retailing stocks are oversold, given that there hasn't been a consumer-led recession in more than 15 years.

Don Yacktman, who manages $360 million in two Yacktman funds, is betting on companies such as Wal-Mart Stores and Home Depot as the ones that will weather the slowdown better than others. "Now's the time to look at names with economic sensitivity," he says. He also has picked up AmeriCredit, a company that provides auto financing, mainly to used-car buyers.

While Mr. Yacktman says housing companies have a long way to go before they can emerge from the slump, he has made a small bet on Pulte Homes. His flagship fund, Yacktman Fund, is up 11% annualized over the past five years.

At the Wintergreen Fund, manager Mr. Winters has the latitude to buy both U.S. and foreign stocks, as well as bonds. For now, Mr. Winters says he is finding a lot of the opportunities in foreign stocks, particularly in Asia.

"We're looking to own businesses that can do well in good times and tougher times," he says. One theme he is playing is tobacco companies, with investments in Japan Tobacco and Imperial Tobacco Group. He also is adding to his holdings in Anglo American, a mining and natural- resources company based in the United Kingdom.

Mr. Winters has stayed away from financial and cyclical stocks but says he is "paying attention" to companies that might be in or nearing a bankruptcy-court filing. His fund is up 10% for the past year.

Some fund managers are still holding on to a chunk of cash for times of dire need. Bruce Berkowitz, manager of the $6.7 billion Fairholme Fund, has reduced his fund's 25% cash position from early last year to about 21% now, and isn't in a hurry to spend it. "My biggest nightmare is running out of cash," Mr. Berkowitz says.

Lately, however, he has sold some existing holdings to raise cash for buying or adding positions in names of some companies he says have been unjustly hurt amid economic and housing worries. These include carpet maker Mohawk Industries and building-materials manufacturer USG

Mr. Berkowitz had been a big buyer of financial stocks during the market downturn of the early 1990s but says this time he isn't so enthusiastic about them. "It's impossible to understand what some of these financial institutions are holding," he says.

Fairholme Fund is up 19% annualized over the past five years.