EDITORIAL: THOU SHALT NOT TIME

In a rising market, cash is a sin. In a falling market, it’s a savior. Unfortunately, short-term-oriented investors seem too quick these days to cast stones at portfolio managers who hold “too much” cash. Just ask Martin J. Whitman, Jean-Marie Eveillard and Foster Friess. Each has been pounded in recent months by planners and pundits for – horrors! – allowing cash to accumulate as stock prices soar.

Mr. Friess, manager of the $7.4 billion Brandywine Fund, practically had to apologize at the annual Morningstar Inc. conference in Chicago last month for taking a 70% cash position when Asian markets collapsed last summer and fall.

Impatient investors have yanked more than $300 million this year from Mr. Eveillard’s underperforming SoGen International and SoGen Overseas value funds. “What’s the point of running a fund for all seasons if the sun always shines,” Mr. Eveillard recently bemoaned.

And Mr. Whitman this month is closing his Third Avenue Value Fund to a crush of new investors so he can slash a 30% cash position that exceeds $600 million. He’ll reopen eventually – with a redemption fee to discourage market-timers.

Fund managers often sit on cash for a sound reason: They’ve more money than buying opportunities. And the macho planner who mindlessly insists that a fund be “fully invested” is not necessarily representing the client’s best interests.

Just where should one “fully invest” – into overvalued or poorly run companies? If a portfolio manager with a widely known investment discipline can’t find enough companies worth owning, then why are planners and clients shocked – shocked! – to learn the manager is waiting for the market to come back down to earth before jumping in?

This is a far cry from market timing – a top-down decision to exit stocks based on a prediction of future market conditions. Mr. Friess certainly seems guilty of the sin, but hold off on the stone-throwing for a moment.

Mr. Friess bet last year – wrongly – that the growing Asian carnage would soon damage the U.S. economy and cause a market correction here. He may yet be proven right. Many top international money managers are saying the deepening Asian recession could knock 25% to 30% off U.S. stock prices in the near future. (See story on Page 3.) The future of U.S. equities, they say, is in the hands of Japanese politicians, and they don’t expect the pols to make the necessary, but difficult choices to properly stoke the Japanese economy.

Mr. Friess may not have been wrong, just early. Alas, that’s unforgivable in an era of 30%-plus annual returns.

A reminder: It’s part of an adviser’s job to temper possibly rash moves by investors, and there’s a body of evidence to suggest that one of those times may be now. Rather than hopping from fund to fund whenever a portfolio manager is deemed to hold “too much” cash – a strategy with potentially painful tax consequences, by the way – a savvy planner could consider moving the cash portions of a client’s portfolio into new equities or funds.

All of this would be unnecessary, of course, if more financial planners and investment advisers would remind themselves, as well as their clients, of a simple commandment: The best path for most investors is a long-term buy-and-hold approach.