Low mutual fund cash levels not telling the whole story

Finding precious few opportunities, some active portfolio managers are sitting on big piles of cash

Feb 6, 2015 @ 9:29 am

By Jeff Benjamin

Headline numbers blasting that equity mutual fund cash levels are low and have dropped over the last year could be misleading advisers into thinking that the managers they're paying to invest client money are working hard on their behalf.

One problem is that derivative strategies and short positions can radically skew cash reporting data.

“It is very difficult these days to tease out what a cash position really means, because this is not your father's cash position anymore,” said Jeff Tjornehoj, head of Americas research for Lipper Inc.

“Derivatives are everywhere, and if somebody doesn't know what a derivative position is, it gets counted as cash,” Mr. Tjornehoj said. “The best way to find out is to probably visit the fund's website or call the 800 number.”

Across the universe of U.S. equity funds, Morningstar Inc. calculates an average cash weighting of 3.2%, versus 3.3% at the end of 2013.

That average number, however, hides the fact that some managers are sitting on big piles of cash.

Jayme Wiggins, portfolio manager of the Intrepid Small Cap Fund (ICMAX), has a 69% weighting in cash because, seven years of a historic bull market for U.S. stocks has left him with nothing he wants to buy.

“I prefer to be fully invested, but I can't produce a good idea out of thin air,” Mr. Wiggins said. “The [Federal Reserve's monetary policy] has forced people into a corner and there just aren't any cheap assets out there.”

The $513 million fund had more than 74% in cash at the end of September, but Mr. Wiggins said it has been more than a year since he bought a U.S.-based small-cap company that is not in the commodity sector.

Eric Cinnamond is similarly frustrated and is sticking with his strategy.

“Small-cap stock prices are outrageous right now, so we're 76% in cash — and that's a record,” Mr. Cinnamond, manager of the $542 million Aston/River Road Independent Value Fund (ARIVX), said. “It's not a market call, it's all bottom-up driven and if we're not getting paid to take risks, we don't.”


As for charging investors a 1.42% expense ratio for holding more than three-quarters of the fund in cash, he won't apologize.

“We tell clients we're not going to overpay with their money, even if that means we forgo a bonus or lose AUM,” Mr. Cinnamond said. “We're sticking to our discipline, so we'll either have zero AUM when it's all over, or you'll see me on the front page of Barron's.”

For financial advisers, this is becoming an increasingly common story across the mutual fund industry, where investors are being charged active management fees while holding huge piles of cash that are losing money because interest rates are so low.

Among popular funds with outsized cash positions:

• the $50 billion First Eagle Global (SGIIX) fund: 20.3%

• the $20 billion FPA Crescent (FPACX) fund:, 44%

• the $10 billion IVA Worldwide (IVWIX) fund: 37%

• the $51 million Frank Value FRNKX) fund: 32%

• the $47 million Intrepid Disciplined Value Investor (ICMCX) fund: 46%

• the $1 billion Weitz Partners Value Investor (WPVLX) fund: 25%

• the $95 million Choe Opportunity (CHOEX) fund: 38%

But while it is true that large cash positions can affect performance, screening for cash allocations isn't always straightforward and sometimes, big cash positions are not warning signs at all..

For instance, a basic screen by Morningstar Inc. of funds holding a lot of cash listed $28 million Credit Suisse Volaris US Strategies Fund (VAEAX) at the top, with over 95% in cash.

In fact, the fund is fully invested, and Morningstar counts U.S. Treasuries used as options collateral as cash in the fund.

The $78.5 million Hennessy Total Return Fund (HDOGX) is another example of a fund that appears to hold more cash than it actually does.

While Morningstar shows the fund holding close to 50% in cash, its unique reverse repurchase technique drops the cash weighting to about 25%, which might still be too high for some investors.


For their part, advisers are generally split on the issue of fund managers holding large cash positions. Some view it as part of the portfolio management process; others claim cash can be held at the financial adviser level and that large cash allocations disrupt overall investment strategies.

“I look for managers with cash because it implies they care about their asset allocation,” said David Haraway, principal at Substantial Financial.

“If a fund is strictly 98% invested at all times, they're not doing any asset allocation — they're just taking bets within their asset class,” Mr. Haraway said. “They're putting it on me to do the asset allocation, but I believe the cash holder is getting paid to do the asset allocation.”

Rose Swanger, principal at Advise Finance, also doesn't shy away from funds with large cash positions, as long as the fund meets other criteria, including strong management and consistent performance.

“In my humble view, I don't treat cash as trash; it's the other way around,” Ms. Swanger said. “I think it takes courage and patience to hold the cash while many people are desperately trying to jump on the last wagon.”

The flipside of that argument: Advisers often choose a mutual fund strategy to serve a specific purpose in a portfolio, and when a manager is sitting on a lot of cash, the strategy objective can be lost.

“You hold cash in something that's designed for cash, not an actively managed mutual fund,” said Linda Homsey, owner of Freya Financial Services.

“When I buy a mutual fund, I don't want to pay a fee for just holding cash; I expect the money to be invested,” Ms. Homsey said. “Plus, a lot of cash tells me that the manager is really just market timing.”

Leon LaBrecque, chief investment officer at wealth management firm LJPR, said he has stopped investing with funds that were sitting in big cash positions.

“I can sit in 25% cash on my own; I'm paying the fund manager to invest the money,” Mr. LaBrecque said. “We definitely look for excess cash holdings, and that's something that will typically show up when we're looking at performance.”


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