Invesco, Longleaf funds stashing cash as bear market cushion

But these funds will look like idiots in a rip-snorting bull market

Jun 8, 2016 @ 1:07 pm

By John Waggoner

You might have clients who want to get in to the stock market, but don't want to take much risk, particularly as the Standard and Poor's 500 stock index flirts with new highs.

Your first job, of course, is to explain that this is like wanting to go swimming but not get terribly wet. Risk and reward are tied at the hip.

Failing that, however, you might consider a fund that has a large cash reserve. These funds will look like idiots in a rip-snorting bull market. But the cash will provide a nice cushion in a bear market, and give management a solid war chest when prices are cheap.

Here are a few cash-rich funds you might consider, although you also have to consider the management style that makes a fund roll up lots of cash.

Some value managers, for example, would rather let money build up in cash than buy expensive stocks. One such fund is the Undiscovered Managers Behavioral Value (UBVAX), which ranks in the top 1% of all small-cap value funds the past five years, and it's in the top 4% the past one and three years. It's carrying 12.13% cash. The bad news: The $4.9 billion fund is closed to new investors.

Another fund that would rather hold cash than hold its nose for expensive stocks is Longleaf Partners Smallcap (LLSCX). The fund sported 20.74% net cash as of March 31, according to Morningstar. It's up 12.49% this year. It's a concentrated fund, typically owning 20 stocks.

As Morningstar analyst Gregg Wolper points out, the approach has brought woe to other Longleaf funds: It held on to Chesapeake Energy long after that company's lights went dim. Nevertheless, the approach has worked reasonably well for this small-cap value fund over time: It's in the top 4% of its peers the past five years.

Invesco Dividend Income (FSTUX), has 18.81% cash, which is high for a fund that's not afraid to keep powder dry. Historically, the fund has held an average 10.31% in cash. In fact, the fund has been rolling up cash since 2012, when its cash pile dwindled to 4.8%. It's in the top 5% of all large value funds for the past five years, and the top 1% for the past one and three years.

Torray (TORYX) is another large-cap value fund that likes to hold cash: Historically, it's held an 11.53% of its portfolio in cash. It's up to 15.7% now. The fund's value-oriented, buy-and-hold strategy puts it in the top third of its peers for the past five years, and the top 9% for the past three years.

Hennessy Focus (HSCFX) is one of the few funds in the Morningstar growth classification that lets its cash run up. Currently, it has 16.3% of its assets in cash, versus a historical average of 11.08%. An opportunistic buyer, the fund waits for stocks it likes to scoop up what it considers a reasonable price. The fund has averaged a 12.58% average annual return for the past 15 years, putting in the top percentile of all mid-cap growth funds.

Not all funds hold lots of cash because they are worried about market valuations. Hennessy Total Return Investor (HDOGX), for example, keeps 50% of its portfolio in cash. The rest it divides more or less equally among the 10 highest-yielding stocks in the Dow Jones Industrial Average — the well-known “Dogs of the Dow” strategy. It's returned 9.06% a year in the past five years.


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