Cash positions in some equity portfolios are rising as cautious portfolio managers are put off by the poor economy.
Adding to the market woes, growth managers in particular say they are having a difficult time finding decent buys.
Derwood Chase, president of Chase Investment Counsel, Charlottesville, Va., hasn't seen enough good growth opportunities in the market to warrant spending the cash. The firm's $42 million large-cap Chase Growth Fund has about 20% of assets allocated to cash, said Mr. Chase, who also manages the fund. That's about as high as he'll let it go. In the past few years, Chase money managers have averaged about 14% cash, Mr. Chase said. "I've been worried about the market since mid-1999," he said, because it has been overvalued and still is.
The high cash allocation is a defensive posture for the portfolio, he explained. "It's time to be cautious," said Mr. Chase, who favors high-quality, growth-at-a-reasonable-price stocks. "As a growth manager, you don't have access to the defensive stocks that value managers have. To have any kind of defensive quality, we have to have cash in there."
The firm's growth separate accounts are limited to 5% cash, he said.
Mutual fund managers typically have more leeway to let cash build than separate account managers, who are often mandated by clients to keep cash allocations within a specific range, said Matt Crisp, co-founder and principal at eVestment Alliance, a Marietta, Ga.-based portfolio tracking firm for the institutional investment industry.
Cash positions as of March 31 for institutional separate accounts were 3.4%, said Mr. Crisp, which is within historical ranges. Typical cash ranges are 3% to 5% said Mr. Crisp, with anything over 5% considered on the high side.
The average cash position for mutual funds is slightly higher. Fund tracker Lipper Inc., New York, reports cash positions around 4.7% as of April 30. Ned Davis Research, Atlanta, another fund tracking firm, measures cash just a bit higher, 5.1%. The numbers are pretty close to what the average has been since mid-1999, when it was less than 4%.
As a result, separate account money managers tend to use excess cash opportunistically while mutual fund managers tend to let cash build to manage risk in the portfolio, said Ned Riley, chief strategist at State Street Global Advisors Inc., Boston.
Mutual fund cash
Chase is not the only growth equity manager to see cash allocations accumulate. Several mutual fund offerings from Janus Capital Corp., Denver, have double-digit cash positions. The $6.6 billion large-cap growth Janus Mercury, managed by Warren Lammert, has about 15% of assets in cash; the $2.4 billion midcap growth Janus Enterprise, managed by Jonathan Coleman, has 13% in cash; and the $12 billion concentrated large-cap growth Janus Twenty Fund, managed by Scott Schoezel, has about 30% in cash. In 1999, Mercury and Enterprise each had 5% in cash and Janus Twenty had 16% in cash.
"The universe of companies that are growing has shrunk in this environment," said Blair Johnson, Janus spokesman.
"We're being highly selective," concentrating on growth companies that make sense from a risk/reward standpoint, he said. The firm is focusing its attention on two areas, stable growth and growth companies in transition.
Newbridge Partners LLC, a New York-based institutional money manager, has been working to keep cash allocations within range, but it hasn't been easy. Jason Dahl, portfolio manager, said the firm typically tries to keep 3% to 5% of the portfolio allocated to cash, but the allocation has increased in recent months. The firm's large-cap growth portfolio had about 10% in cash as of May 31.
"It's been somewhat of a challenging environment for large-cap growth investors, to say the least," Mr. Dahl said. The increasing cash component of the portfolio is not by design. "We're trying to find good growth opportunities;" there just aren't many out there right now, he said. "To the extent that we can find high-quality, high-growth stocks, we will add them to the portfolio."
In June, the large-cap growth management team found some good opportunities, adding two names to the portfolio, Affiliated Computer Services Inc. and L3 Communications Inc., which should lower the cash position to about 6%, Mr. Dahl said.
Some value managers also have let cash positions rise.
Greg Serrurier, portfolio manager at Dodge & Cox, San Francisco, said cash allocations have climbed to about 10% in the $12 billion large-cap value Dodge & Cox Stock Fund. Consistent inflows have increased cash positions, and the management team has not been able to invest it all due to the relative dearth of opportunities. However, the team plans to get down to the 5% cash range, the historical average, said Mr. Serrurier.
Pacific Financial Research Inc.'s $5.1 billion Unconventional Value separate account has 30% of its assets in cash, said Paula Ponsetta, spokeswoman for the Beverly Hills, Calif.-based money manager. Ms. Ponsetta said the high cash allocation is a residual effect of the portfolio's strict buy and sell discipline: Stocks may be purchased only at a 30% discount to intrinsic value. The overvalued market makes it difficult to find stocks that meet that criterion, she said.
"We're finding some opportunities now in this ugly market, but we've still got some dry gunpowder."
Some of Fidelity Investment Inc.'s top-performing value equity funds also are seeing higher-than-usual cash allocations:
* The $17.9 billion Fidelity Low-Priced Stock Fund, a small-cap value fund, had about 23.3% of assets in cash as of May 31, up from about 17% at the end of January.
* The $763 million large-cap value Fidelity Fifty Fund had 31.8% in cash, up from 9.6% at the end of 2001.
* The $1.7 billion Fidelity Small Cap Stock fund had 14.8% in cash, vs. 10.2% last Oct. 31.
* The $6.8 billion Fidelity Value Fund had 11.1% in cash as of May 31, up from 6.2% Oct. 31.
Spokesman Vin Loporchio said the low-priced fund's cash reserves resulted from increased investments in the fund that has since closed to new investors. Mr. Loporchio didn't comment on why the other funds' cash positions rose.
One market observer said the high cash holdings were not entirely the market's fault.
"If money managers are holding on to cash, it's not because of a soft market," said Dan diBartolomeo, president of Northfield Information Services Inc., a Boston-based portfolio analyzer. "It's a permanent recognition that investors care about absolute risk as much as relative risk."
What more money managers are doing, he said, are adding cash to their portfolios because they feel their benchmarks are too risky in this market. He said investors are paying more attention now to absolute return. "People are realizing that you don't pay the bills with relative money," he said.
But William Dougherty, president of Boston-based mutual fund tracker Kanon Bloch Carre, said money managers might be holding on to more cash because many fear the market hasn't hit bottom yet.
Meanwhile, considering how bad the market has been, mutual fund flows have been coming in stronger than they were last year, he said. When money managers forced the excess cash flows to work in the overvalued market of late 1999-early 2000, it was the last breath of air that popped the bubble, he said. This time around, managers are being more prudent with cash flows.
"Stock money won't go to work until they know there's a floor," Mr. Dougherty said.