Bad timing: Stock fund cash levels hit record low

BOSTON (AP) ? Cash is comforting. That’s the belief many investors embrace when the stock market starts to head south or swing wildly.

But the desire of average investors to hold onto their cash, and pull money out of stock mutual funds, has left portfolio managers with fewer dollars to hold onto themselves.

The percentage of stock fund portfolios that’s kept in cash is at a record low level. Because fund assets are close to being fully invested, it’s leaving mutual funds little cushion from the market’s steep drops in recent weeks.

And if stocks mount a sustained rebound, managers won’t have much sidelined cash to put to work ? unless they sell some existing investments to free up money for stock purchases.

Stock mutual funds held an average 3.4 percent in cash as of June 30, the latest data available, according to the Investment Company Institute, an industry trade organization. That’s down from 3.7 percent a year earlier. But it’s the lowest percentage in ICI records dating to 1984.

With relatively little spare cash to put to work, stock fund managers “probably will not be the driving force behind any market rebound now,” says Matthew Lemieux, an analyst with fund tracker Lipper Inc.

Stock funds maintained their largest percentage of cash in 1990, when the average stood at more than 11 percent.

Managers who believe the market is due for a downturn will sometimes trim their stock holdings and move the proceeds into money-market funds or Treasury bonds, places where cash is safe. Of course, it’s a speculative game. If stocks rally, investors end up with smaller returns than they would had their fund been fully invested.

If you want to find out how much cash a mutual fund is holding, check its latest portfolio holdings report. Many fund websites now list what stocks the fund owned as of the end of June, although cash stakes at some funds might have changed substantially since then. Quarterly shareholder letters also are a good place to get some insight on how a fund manager is thinking about the market and the level of cash in the fund. Investing websites like also list recent portfolio holdings data.

A key reason for the current record-low cash stake is the huge amount investors have pulled from stock funds since the 2008 financial crisis, Lemieux says. Investors have withdrawn a net $266 billion since January 2008, according to ICI.

Much of that money was shifted to bonds, reflecting investors’ decreasing comfort with stock volatility. Bond funds have raked in a net $731 billion.

Stock fund were taking in money at the start of the year, but that momentum shifted in May when stock prices fell for the first month since last summer.

After such a long drought of new cash coming in, fund managers were keen to make new investments early this year as stocks rallied, Lemieux says. So they drew down their cash reserves.

The magnitude of withdrawals in recent years isn’t the only reason why cash levels are so low. Fund managers have more tools than they did a decade ago to quickly move in and out of the market. A fund’s cash stake can shift rapidly, as managers use exchange-traded funds to buy a group of stocks when they sense opportunity, then sell when it’s time to pull back. Markets also are more efficient, making it easier to stay fully invested. There’s been a long-term narrowing of “bid-ask spreads,” gaps between a security’s asking price and its selling price.

Yet with their current low cash stakes, fund managers could miss some of the rally if the market rebounds, and they’ve got little in reserve to buy stocks. Those reserves may dwindle further if stock fund investors respond to the recent market turmoil by pulling out more cash. That’s been the recent trend: From June 1 through Aug. 3, investors withdrew a net $59 billion.

Overall, stock funds had about $199 billion in cash at the end of June, out of their total $6 trillion in assets. Lemieux believes that amount of cash is enough to handle any surge in investor withdrawals.

But some managers with low cash stakes would be forced to sell stocks so they can return investor money on demand. If stocks continue to falter, a manager selling holdings could be locking in losses for the fund’s investors, rather than potentially buying stocks on the cheap.

Many managers wish they could be in Mark Travis’ position. One of the funds he co-manages, Intrepid Small Cap (ICMAX) had a 37 percent cash stake as stocks sank this week. Other funds at Travis’ company, Intrepid Capital Management, were 10 to 28 percent in cash.

When the Dow Jones industrial average plunged 635 points on Monday, Travis bought shares of Collective Brands ? the operator of Payless ShoeSource stores ? after they sank below $10 a share. They had traded around $22 in April, when Travis considered the stock too pricey. He kept an eye on it because he figures Payless’ low prices will bolster sales in a tough economy.

Stocks like that are one of the reasons Travis and his co-managers rarely let their cash slip below 10 percent.

“If we had been fully invested on a day like Monday, it would have been next to impossible to sell one of our stocks so we could buy another that we liked better,” Travis says.

Their tendency to keep plenty of cash has also helped limit losses when stocks fall ? one of the reasons why three of Intrepid’s four funds have 5-star ratings from Morningstar.

Travis says investors have withdrawn more than they’ve deposited into those funds the past couple weeks. By maintaining a sizeable cash stake, he hopes to convince investors that he cares about protecting them from losses.

“Unfortunately, I sell a redeemable product. I can’t control my shareholders’ emotions, I can only control mine,” he says. “So it’s always good to have some extra cash on the side.”


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