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Some Stock Fund Managers Don't Think Cash Is Trash

June 05, 1998|TOM PETRUNO

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, however, cash is basically trash: Industry-wide data show that the average stock fund had just 4.2% of 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 the market 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 zoomed 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 its managers have jumped back into stocks in a big way, cutting cash to 8% of assets by mid-May.

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Still, everybody knows (or should) that the market's hot returns since 1994 won't keep up forever. And with most funds nearly fully invested now, it begs the question: If the market were to tumble--pushing many stocks into bargain territory--how many fund managers would be 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 rising 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.

Who's got cash among stock funds today? Here are a few ideas--by no means an all-inclusive list, but at least a research starting point for investors who want to be in the market, but not too far in:

* 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 return of 136% 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 significant stakes in cable TV, telecom and financial stocks, now has 25% of its $500 million in assets in cash and 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" and "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, and they have a "successful track record of shifting assets in a timely manner," says fund tracker Morningstar Inc.

Despite its bond allocation, the Vanguard fund has nearly matched the performance of the average stock fund over the last five years.

For the socially conscious, the no-load Pax World Fund ([800] 767-1729) now has about 47% of its $676 million in assets in cash and short-term bonds. It always keeps at least 25% in such securities. The fund, whose longtime manager Tony Brown retired in April, was among the top-performing balanced funds over the three years ended March 31, up 81%.

It now is co-managed by Robert Collin and Christopher Brown, who own such names as AirTouch and Gap Inc. but who say they are willing to wait for better prices to invest more fully.

Two caveats with all cash-heavy funds: They may well sit out the market too long. And even when they put their cash to work, there's no guarantee they'll buy the right stocks.

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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.

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