More Stock Mutual Funds Declare Cash is King

Now the herd does this? Not 40-50% higher? or 30%? or 20%?

Hmm... maybe the bottom *is* in after all (once the herd starts doing something....)

Via Wall Street Journal

• Several top stock-focused mutual funds are beating the market by pulling out of it. Their ploy: Go heavily into cash. While cash will make hardly any money, given near-zero interest rates, it won't get hit by sudden market downdrafts.
• Holding cash has been a winning move with most markets down. But cash-laden stock funds risk alienating investors if the market rallies and they still are on the sidelines.
• Of the funds with the biggest cash stashes in their categories, one of the most sizable belongs to the $11 billion Mutual Discovery (MDISX) fund, an international portfolio. It is almost 30% in cash, up from 8% in 2007. The $3 billion Sequoia Fund, (SEQUX) modeled on Warren Buffett's value-investing style, was recently 18% in cash, up from 3% about a year ago. (Sequoia is actually one of the long time winners in the fund industry, and recently reopened after being closed since... 1982)
• The dry powder shows how nervous money managers have become about the market. Mutual Discovery never topped 25% cash even in tough years like 2001. "We're going through extraordinary times, and we have to react in an extraordinary way," said co-manager Anne Gudefin. (true...)
• Cash over 5% is generally considered a lot for the average stock fund. But almost 30% of diversified U.S. stock funds are keeping more than 5% in cash now, up from 24% a year ago and in 2007, said Morningstar. Cash peaked in the past decade at an average 6.5% of stock-fund assets by November 2000, during the tech bust, said fund-industry group the Investment Company Institute. It recently stood at 5.9%, up from 4.2% a year ago.

Cash is "trash" in the mutual fund world. Even if it means losing your pants, the thesis is stay in the market. Now there are exceptions like Rob Rodriguez - who took a lot of grief for going to high cash levels "too early" [Mar 12: First Pacific Advisors - FPA Funds Robert Rodriguez to Take 1 Year Sabbatical]

• The performance of cash-heavy funds is vindication for investors like First Pacific Advisors Chief Executive Robert Rodriguez, who has been advocating cash for years. His $753 million FPA Capital Fund's 33% cash position is one of the biggest among diversified U.S. stock funds.
• "Maybe now people will realize cash is part of money management, not asset allocation," said Mr. Rodriguez, who will turn over the fund to its co-managers when he goes on a one-year sabbatical next year. FPA Capital is beating 97% of peers this year and, just 1% in the red, is topping the market by almost eight percentage points. (tell 'em Rob... )

Now there is a reason for mutual funds to never go to cash; many who sell mutual funds (advisors) want to put their clients into specific allocations (stocks/bonds/etc) and if a mutual fund is not 100% stock, then they aren't able to put their clients into the correct "configuration"

• The cash-tilted approach riles investment consultants who advise clients including endowments, pensions and individual investors. Many deride the move as "market timing" and said it violates investors' expectations that stock funds are supposed to mainly invest in stocks. They worry that managers might miss a big rebound while sitting out the market. They also said it is their job to allocate cash for client portfolios, not the fund managers. (a job I am sure they got correct the past two years... ahem) Particularly galling, they said, is paying fund managers for their stock-picking prowess only to watch them invest in basic cash instruments like money-market funds and Treasury bills. (aren't you paying them to make profit or at least limit loss for your clients any way possible?)
• Emmanuel Ferreira, who runs the $1.4 billion asset-allocation fund Oppenheimer Quest Opportunity Value (QVOPX), said he couldn't care less what consultants think about his cash stake. (bravo) "For the consultants who say 'we're making allocation choices for our clients,' it's becoming clear they didn't see this [bear market] coming and probably shouldn't have been in the position of responsibility to make those calls," he said. (uhh... triple standing ovation bravo) His fund has 60% invested in cash, up from 20% in 2005. The fund kept only 20% in cash during the last bear market. The fund is at the top of its peer group and is up 3.7% in 2009.
• The most common question such managers are receiving is when they will pounce on the market. Many managers, including Mutual Discovery's Ms. Gudefin, believe beaten-down stocks have further to fall.

At least a few soul mates out there....