Financial advisers are often critical of mutual funds with large cash positions, based on the argument that investors don't want to pay an active-management fee for idle cash.
The flipside, however, is that in times of sudden market pullbacks those
cash-heavy portfolios are best positioned to weather the storm, either by having enough cash to meet redemptions, having ready cash to buy into the market dip, or just letting the cash hedge the downside exposure of stocks in the portfolio.
The case for cash is always easier to make when markets turn volatile, as they did with a vengeance following last week's
vote in the United Kingdom to leave the European Union.
“Typically, people tend to think of cash on a fund's books as a negative, but in times of volatility it gives those portfolio managers a potential leg up,” said Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.
“Those managers with a lot of cash could have taken advantage of the volatility we saw on Friday and Monday,” he added. “Portfolio managers usually have a short list of potential investment ideas, and can also stand ready to increase some positions when they have cash available to put to work.”
Trouble is, even with the supposed “leg up” advantage, fund companies are often reluctant to address the scarlet letter of heavy cash balances in active funds.
Working from a screen of funds with at least 10% allocated to cash, some fund companies had no interest in commenting for this story.
A spokeswoman for Franklin Templeton declined to comment regarding the 10.3% cash weighting in the $11.9 billion
Franklin Growth Fund (FKGRX). In an email response, the spokeswoman said the fund's cash position is now down to 8%, despite Morningstar still listing it as 10.3%.
At Invesco, when asked to comment on the 12.9% cash weighting in the $15.6 billion
Invesco Diversified Dividend Fund (LCEAX) , a spokeswoman offered comment on other investment products and strategies, but declined to comment on that particular fund.
That kind of backdrop makes the response from First Eagle Investment Management particularly noteworthy.
When asked about the published 16% cash position in the $14.1 billion First Eagle Overseas Fund (SGOIX), director of research Matt Lamphier said the cash is now closer to 20%, and added that the fund's 12% allocation to gold and gold stocks makes up a 30% allocation to “deferred purchasing power.”
“We consider that to be a ballast against adverse conditions,” said Mr. Lamphier, who is neither denying nor shying away from the heavy allocation to cash and cash equivalents.
This year through Tuesday, the
fund is up 3.75%, which compares to a 6.06% decline for the foreign large blend category as tracked by Morningstar.
Last year the fund gained 2.56%, which the category averaged a decline of 1.59%.
Mr. Lamphier attributes the outperformance to the exposure to
high-flying gold and a general avoidance of Japanese and European bank stocks.
“The whole European banking sector has been a difficult place, and it can be 15% to 20% of the market depending on the index, so we've been very fortunate in that respect,” he said. “We don't own financials, or money center banks in Japan or in Europe because they're too levered and too opaque for us.”
Thus, the heavy allocation to what amounts to cash alternatives. And that's not something investors should expect to change anytime soon.
Even the recent market pullback wasn't likely enough to alter that position, according to Mr. Lamphier.
“We are starting to see some value start to emerge, but the S&P 500 is still really at an all-time high, and even with the pullback the S&P is now flat for the year,” he said. “Hopefully, we're not starting to define bear markets as flat markets.”
