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How American's Putting Cash to Work

How cash stakes of some American funds have declined, and what the managers of those funds are buying.

John Coumarianos, 12/07/2009

American's equity funds often have held healthy cash positions. Of course, because of the multiple portfolio counselor system, the aggregate cash position of a fund is the result of many disparate decisions of the underlying counselors. Those cash stakes, however, can also help avoid problems that fund flow issues could cause--having to sell stocks to meet redemptions, for example--while also allowing the counselors to pounce on opportunities when they arise. Holding cash both as ballast and as an option on future bargains is a strategy many value investors employ.

Based on our analysis of recent regulatory filings, some American Funds now have decidedly lower cash stakes than they have had in the past. In other words, the counselors running the funds may be "exercising their options" and buying stocks at what they think are cheap prices. This is understandable, given that 2008 was a horrendous year for the markets and that stocks were arguably very cheap in early 2009, despite problems in the financial system and the economy at large.

One might have expected the market's fierce bounce back since March 2009 to deter some of American's counselors from continuing to buy stocks, it doesn't appear to have discouraged all of them. Like many American Funds' counselors, Warren Buffett recently bagged the "elephant" he'd been looking for by purchasing Burlington Northern BNI for Berkshire BRK.B. (Capital Group, parent of the American Funds, happens to be the largest institutional owner of Burlington Northern.)

However, not all of American's funds have decreased their cash stakes. Some have increased or maintained their cash stakes.

In this article, we'll take a look at how cash stakes of some funds have declined, and discuss what the counselors of those funds are buying. We'll also look at other funds that have maintained hefty cash stakes.PAGEBREAK

Where Cash Stakes Are Declining

American Funds AMCAP AMCPX
American Funds AMCAP, our newest Analyst Pick in the large-growth category, is one of the American's most flexible funds. Although it's primarily a stock fund and tends to find its home in the large-growth square of Morningstar's style box, it has the ability to invest in convertible preferred stocks and cash. It also has among the highest concentrations of mid-cap stocks of American's funds. As recently as September 2008, the fund's cash stake was 14.4%, while its bond stake was another 2.5%. For much of the past three years, the fund's cash stake exceeded 10%, and reached as high as 17% at the end of 2007.

Now, by contrast, AMCAP's cash stake is under 7%, and it has almost no bond exposure. Among its biggest stock additions before Sept. 30, 2009, were initial positions in office supply retailer Staples SPLS, insurer Aetna AET, and credit card processor MasterCard MA and a large addition to Bank of New York Mellon Corp BK.

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