As volatility continues, more mutual funds go to cash

The upside and downside of sitting on the sidelines

Aug 31, 2015 @ 12:43 pm

By Jeff Benjamin

As stock market volatility continues, some financial advisers are warming to the idea of mutual fund managers taking cover behind growing piles of cash.

“I think cash is a significant strength right now, and we're screening for it, and funds with excess cash are ranked high on the scale,” said Vincent Barbera, managing partner at Newbridge Wealth Management.

Mr. Barbera, who is already allocating between 5% and 10% of client portfolios to cash, is giving high marks to mutual fund managers who aren't afraid to admit they don't want to be fully invested.

A couple of his current favorites include the $9.8 billion Tweedy Brown Global Value Fund (TBGVX), which has 22.5% allocation to cash, and the $3.7 billion IVA International Fund (IVIQX), which has a 33.5% cash position.

“Strict mandates to be fully invested are great when you're talking about a bull run,” Mr. Barbera said. “But considering this environment, the risks you have to take right now to get positive returns are just not worth it.”

Across the broad universe of domestic long-only stock funds, as tracked by Morningstar Inc., the average allocation to cash is about 4%, and essentially unchanged from a year ago.

But, as savvy advisers are realizing, there are plenty of funds with stockpiles of cash on the sidelines to be found through some basic screens.

One of the perennial cash cows is the $321 million Intrepid Endurance Investor Fund (ICMAX), which boasts at 70% allocation to cash.

“We've chosen to succeed unconventionally,” said Mark Travis, Intrepid president and chief investment officer.

“Volatility is up right now and we're obviously doing something different than a lot of other people,” he added.

An even more extreme example of trying to dodge the recent stock market carnage is the $60 million WBI Absolute Return Dividend Fund (WBDGX), which is 90% in cash right now, according to Donald Schreiber, chief executive of WBI Investments.

“We've got a lot of cash because we have an actively risk-managed process,” he said.

Scot Hanson, a financial adviser with Educators Financial Services, doesn't necessarily look for fund managers holding lots of cash, but he does consider a big cash position to represent a well-informed strategy.

“I understand what they're trying to accomplish,” he said. “If I'm looking for less risk, I have no problem with a manager taking a larger cash position.”

For financial advisers, mutual funds with heavy cash positions can introduce new challenges, and some questions, according to Morningstar analyst Laura Lutton.

“It brings up the question of whether the financial adviser is better at moving clients to cash than a money manager,” she said.

Accepting big moves in and out of the market can also create higher expectations on fund managers to successfully time the market.

“I don't have an issue with a portfolio manager who raises a bit more cash than usual when he or she perceives that market valuations are unsustainably high, but I would have a concern with a manager who habitually maintains higher than ordinary cash levels,” said Gilbert Armour, an adviser at SagePoint Financial.

“Specifically, if cash is more than 10% of the portfolio, there should be a darn good reason for it, and that position should be temporary,” he added. “I typically recommend that clients have sufficient cash positions to handle emergencies and ordinary living expenses, so I expect my portfolio managers of longer term assets to be relatively fully invested for a better long-term performance.”

Whether advisers embrace the idea of portfolio managers moving in and out of cash or not, the fact that it's happening needs to be factored in, said Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.

“When you see this kind of volatility, you will see more of this by active managers,” he said. “The challenge is doing asset allocation if your manager is not fully invested, because you may have less exposure to that asset style than anticipated.”

Mr. Rosenbluth added that the other side of finding managers willing to move into cash is watching to make sure they're at least trying to take advantage by also moving back into stocks.

“It is normal to see some of this cash build up, because this period we're in right now is what active managers are set up for,” he added. “But it's important to see if they're also willing to put the money back to work during the kinds of buying opportunities we saw last week.”

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