Being cautious can sometimes be the boldest move of all.
Josh Strauss, a self-professed bargain hunter and portfolio manager at the Appleseed mutual fund, gets interested in a stock when confidence in it has plunged, and his goal is to buy when its price is 50 percent lower than what he thinks it should be.
When Strauss looks at the stock market today, he finds pickings so slim that he would rather invest in nothing. Roughly 16 percent of the Appleseed fund is sitting in cash. Another 15 percent is invested in gold because he’d rather bide his time in safer investments than buy into a stock market that he considers too expensive.
“We want to deploy capital when prices are attractive, and they’re just not,” Strauss says. “Every time there’s a sell-off, the market comes right back.”
Strauss is part of a relatively small group of mutual-fund managers willing to stash large amounts of their portfolios in cash, even as stock prices approach record highs. Roughly three dozen of the more than 2,000 funds categorized as U.S. stock funds have a quarter or more of their holdings in cash, according to Morningstar. These managers see a market that looks expensive by several measures and say they’ll protect themselves, and their shareholders, by sheltering in cash.
“Welcome to the most expensive U.S. stock market in history,” Brian Frank, a portfolio manager, wrote in his quarterly letter to shareholders at the end of March. His Frank Value fund has 64 percent of its portfolio in cash. The fund has historically kept an average of just 5 percent in cash, going back to its 2004 inception.
“Our computers look at 3,000 companies a day. I did in-depth research on hundreds last year, and I bought just one: Barrick Gold,” Frank says. “That’s how few and far between it is to find good valuations out there.”
Most fund managers agree that the stock market looks either fairly priced or expensive, but certainly not cheap. Still, the vast majority aren’t hiding out in cash.
Every mutual fund keeps some cash on hand. They need it to return to any investors who sell their fund shares that day, but it’s usually just a small piece.
One reason many stock funds stay “fully invested” is because their shareholders may be taking it upon themselves to decide when to dial back on stocks and increase their own cash holdings.
That’s why it’s important to check in on your fund and see if the managers take it upon themselves to back out of stocks, or if they leave the decision up to shareholders. Invest accordingly.
Index funds will generally remain fully invested. “Allocation” funds, meanwhile, regularly shift their investments from one market to another seeking the best value.
A fund that hides out in cash when it senses trouble has a clear upside: Not only does it offer protection if stocks are about to fall, it also preserves a cache of what the industry calls “dry powder.” If stocks crash, these funds will have cash on hand to buy low when the market is cheap. Funds that remain fully invested, meanwhile, will fall with the market.
