Equity managers keeping gunpowder dry
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 Corp. in Charlottesville, Va., says he 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, says 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 says. “I’ve been worried about the market since mid-1999” because it has been overvalued and still is.
The high cash allocation is a defensive posture for the portfolio, he explains. “It’s time to be cautious,” says 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.”
He says the firm’s growth separate accounts are limited to 5% cash, the top of the typical range for such portfolios, which were averaging 3.4% at the end of the first quarter.
The average cash position for mutual funds is slightly higher. Fund tracker Lipper Inc. of New York reports cash positions at around 4.7% as of April 30. Atlanta’s Ned Davis Research, another fund-tracking firm, measures cash just a bit higher, at 5.1%. The numbers are pretty close to what the average has been since mid-1999, when it was less than 4%.
Several mutual fund offerings from Janus Capital Corp. in Denver have double-digit cash positions. The Janus Mercury Fund, a $6.6 billion large-cap-growth portfolio managed by Warren Lammert, has about 15% of assets in cash; the $2.4 billion mid-cap-growth Janus Enterprise Fund, 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,” says Blair Johnson, a Janus spokesman.
“We’re being highly selective,” concentrating on growth companies that make sense from a risk/reward standpoint, he says.
Some value managers also have let cash positions rise.
Greg Serrurier, portfolio manager at Dodge & Cox in San Francisco, says 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, says Mr. Serrurier.
Pacific Financial Research Inc.’s $5.1 billion Unconventional Value separate account has 30% of its assets in cash.
“We’re finding some opportunities now in this ugly market, but we’ve still got some dry gunpowder,” says Paula Ponsetta, spokeswoman for the Beverly Hills, Calif.-based money manager.
Some of Boston’s Fidelity Investments’ 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, up from 10.2% Oct. 31.
William Dougherty, president of Boston-based mutual fund tracker Kanon Bloch Carre, says money managers might be holding on to more cash because many fear the market hasn’t hit bottom yet.
Meanwhile, mutual fund flows have been coming in stronger than they were last year, he says. When money managers forced the excess cash flows to work in the overvalued market of late 1999 through early 2000, it was the last breath of air that popped the bubble, he says. This time around, managers are being more prudent with cash flows.
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