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

July 9, 2012

MONDAY, JULY 9, 2012    ©2012 Dow Jones & Company. All Rights Reserved

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

Managers of global mutual funds have upped
their cash positions, on average, to 4.2%—a 45%
increase from a year ago and the highest level in five
years, according to research firm EPFR. Meanwhile,
a new survey by TIGER 21, a network of investors
with at least $5 million in investible assets, found its
members had 13% of their portfolios in cash during
the second quarter, up slightly from the previous

It isn’t entirely clear what signals regular investors
should take from these moves: Some pros say they
are in cash in order to capitalize on what they expect
will be bargains in stocks, while others say they
simply fear a market downturn.

In any case, experts say, the activity highlights
pros’ increasing unease with the markets. Given the
lack of significant progress in fixing Europe’s debt
problems, and mixed signs of economic improvement
at home, many money managers expect another
round of market volatility ahead.

But dives in the markets often represent
opportunities, says Sam Stewart, chairman of Wasatch
Funds. He increased the cash allocation in two of his
funds—the $131 million World Innovators fund and
the $42 million Strategic Income fund—from about
5% last year to 13% and 11%, respectively. “I want
enough dry powder that I’m well stocked in event
things get ugly here,” he says, adding that he already
started tapping that cash to pick up bargains like
Herbalife Ltd., HLF -1.23% a nutrition and weight-
management company.

Other investors, including Tom Forester, manager
of the only stock fund to make money in 2008—the
$236 million Forester Value fund—are raising cash
as a protective measure. Mr. Forester, who raised his
fund’s cash to 25% from 17% last year, says many
U.S. companies are lowering their earnings estimates,
while corporate treasurers are hoarding cash rather
than deploying it for hiring or investments. Both are
bad signs for any recovery, analysts say.

Critics say such moves to cash are akin to market
timing, which research has shown often leads to
losses as investors pick the wrong times to move
back into stocks.

But many raising cash levels say they have no
choice: They don’t see much worth buying. Abhay
Deshpande, manager of the $35 billion First Eagle
Global fund, says European stocks that are cheap
now often also come with distressed balance sheets
or businesses. “There has been no shock to dislodge
the stock prices to a material discount,” he says. As
a 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 Wealth
Management, has raised the average cash position
for clients to 22%, from about 10% last year,
parking it mostly in high-rated, short-duration bonds
earning between 1.3% and 2.5%. He says his clients
understand they could miss out on bigger potential
gains. “We are more focused on a need to preserve
assets not hit home runs,” Mr. Fein says.

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