Parsing the Cash Piles: Bad Storm Rising or Stocking Up for a Sale?

MONDAY, JULY 9, 2012 ¬©2012 Dow Jones & Company. All Rights ReservedParsing the Cash Piles: Bad Storm Rising or Stocking Up for a Sale?By RESHMA KAPADIAManagers of global mutual funds have uppedtheir cash positions, on average, to 4.2%-a 45%increase from a year ago and the highest level in fiveyears, according to research firm EPFR. Meanwhile,a new survey by TIGER 21, a network of investorswith at least $5 million in investible assets, found itsmembers had 13% of their portfolios in cash duringthe second quarter, up slightly from the previousquarter.It isn’t entirely clear what signals regular investorsshould take from these moves: Some pros say theyare in cash in order to capitalize on what they expectwill be bargains in stocks, while others say theysimply fear a market downturn.In any case, experts say, the activity highlightspros’ increasing unease with the markets. Given thelack of significant progress in fixing Europe’s debtproblems, and mixed signs of economic improvementat home, many money managers expect anotherround of market volatility ahead.But dives in the markets often representopportunities, says Sam Stewart, chairman of WasatchFunds. He increased the cash allocation in two of hisfunds-the $131 million World Innovators fund andthe $42 million Strategic Income fund-from about5% last year to 13% and 11%, respectively. “I wantenough dry powder that I’m well stocked in eventthings get ugly here,” he says, adding that he alreadystarted tapping that cash to pick up bargains likeHerbalife Ltd., HLF -1.23% a nutrition and weight-management company.Other investors, including Tom Forester, managerof the only stock fund to make money in 2008-the$236 million Forester Value fund-are raising cashas a protective measure. Mr. Forester, who raised hisfund’s cash to 25% from 17% last year, says manyU.S. companies are lowering their earnings estimates,while corporate treasurers are hoarding cash ratherthan deploying it for hiring or investments. Both arebad signs for any recovery, analysts say.Critics say such moves to cash are akin to markettiming, which research has shown often leads tolosses as investors pick the wrong times to moveback into stocks.But many raising cash levels say they have nochoice: They don’t see much worth buying. AbhayDeshpande, manager of the $35 billion First EagleGlobal fund, says European stocks that are cheapnow often also come with distressed balance sheetsor businesses. “There has been no shock to dislodgethe stock prices to a material discount,” he says. Asa result, the fund’s cash exposure is up near 20%,about 5 percentage points higher than late last year.Many financial advisers also are turning to cash.Michael Fein, managing partner of CIC WealthManagement, has raised the average cash positionfor clients to 22%, from about 10% last year,parking it mostly in high-rated, short-duration bondsearning between 1.3% and 2.5%. He says his clientsunderstand they could miss out on bigger potentialgains. “We are more focused on a need to preserveassets not hit home runs,” Mr. Fein says.