The Wall Street Journal-20080119-Green Thumb- Cash-Rich Mutual Funds May Battle Bear
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Green Thumb: Cash-Rich Mutual Funds May Battle Bear
As stocks flirt with bear-market territory, mutual-fund investors shopping around right now might want to consider funds sitting on a lot of cash -- since it positions them to bargain-hunt if the occasion arises.
There's a lot of funds like this out there. But they're not all created equal.
The average U.S.-stock mutual fund held 7.3% of assets in cash through the end of last year, the highest year-end figure since 2000, according to Morningstar Inc.
In the just-ended week, the Dow Jones Industrial Average fell 4%, and the Standard & Poor's 500-stock index fell 5.4%, giving back much of their gains from last year. In light of that, as well as weaker jobs, retail, and housing data -- and the pain felt by Wall Street firms -- many fund managers say the best offense right now is defensiveness.
For investors, finding the right cash-rich funds boils down to whether the manager is holding cash as a conservative bet and plans to sit on the sidelines for part of the year, or is holding it as a way to time the markets and plans to swoop in for cheap stocks. A past record of volatile returns for the fund would suggest the latter -- but could still be appealing for a more risk-tolerant investor.
Investors can also compare holdings in recent quarters to see where managers have deployed big cash stakes. Buying entirely new stocks, rather than adding to existing positions, could be a sign of aggressiveness.
Bob Rodriguez, manager of the $1.9 billion FPA Capital Fund, is 43% in cash, up from 40% more than a year ago. The fund focuses on finding small stocks it thinks are undervalued.
Stocks like these have been crushed in recent weeks, turning up hundreds of new potential investments, he says. Still, "I'm not prepared" to commit new money. The fund is down 9.5% in the past year, but ahead of most peers.
The $6 billion AIM Charter Fund kept up to 20% in cash at its recent peak, giving it room now to make some purchases. This includes stock in Wells Fargo & Co., which could outperform as "old-fashioned banks" (ones that live with their loans, rather than selling them off as complex derivative securities) come back into favor, says manager Ron Sloan. The fund is up about 1% in the past year, well ahead of the S&P 500.
Of course, cash and similar investments are facing their own pressures. The continued flight into safer investments has pushed down yields for 10-year Treasuries, where managers often park in troubled times. However, "we aren't trying to make money from our cash position," but instead simply use it to preserve principal, says David Tice, a manager of the $925 million Prudent Bear fund.
The fund both buys stocks and also bets against them by engaging in short-selling. Its bearish bets have risen to 74% from 70% in recent months.
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Cash Pile
Many mutual funds are sitting on cash as stocks struggle. Investors should
keep in mind:
-- Some funds are starting to put that cash to work as they spy buying
opportunities.
-- But investors must weigh whether big cash stakes signal conservatism or
potential interest in trying to "time" the market.
