After a strong six months for stocks, have those who can raise cash done it?
We've come a long way. Since the market hit bottom in early March 2009, the S&P 500 Index is up an annualized 27.8%. If you don't feel like celebrating that accomplishment, you're not to be blamed. There has been a lot of volatility along the way, and that overall gain has come in fits and starts and perhaps with some sleepless nights. The past six-month period has been another of the market's strong runs. Since Oct. 3, 2011, the S&P 500 Index has gained 22.6% cumulatively.
Considering that backdrop, I was curious about those few managers who can and do raise cash when they think bargains are scarce or who pad their coffers for better opportunities tomorrow. What follows is quick summary of those observations.
The Global Value team at First Eagle runs three diversified mutual funds: First Eagle Global SGENX, First Eagle Overseas SGOVX, and First Eagle U.S. Value FEVAX. The cash levels of all three, which generally hover in the low teens as a percentage of assets, dropped through 2008 and early 2009 as the markets swooned following the Lehman Brothers collapse. Back then, managers Matt McLennan and Abhay Deshpande were particularly excited about U.S. large caps and added a number of such firms.
More recently, however, cash has been creeping up at two of the three funds. Whereas Overseas has maintained its low-teens cash weighting for some time, Global and U.S. Value's cash stakes have moved a bit higher, to almost 20%. Part of the explanation for Overseas' lower cash stake could be that it has a near 30% weighting in Japan, an area where management has long found cheap stocks. And part of the higher cash weighting in Global and to some extent the much smaller U.S. Value probably stems from inflows. Still, the managers have been slower to put that money to work.
Third Avenue Small Cap Value TASCX
Unlike his colleagues at Third Avenue, manager Curtis Jensen has taken cash in the portfolio up to more than 20% of assets. This comes after the fund had reduced its cash weighting to single digits in 2008 and maintained that level through the early part of 2010.
Jensen's higher cash stake coincides with less attractive valuations for small- and mid-cap stocks which, in the aggregate, have enjoyed three-plus years of outperformance relative to large-cap fare. However, there's more to it here. In the wake of a relatively weak performance stretch for Small Cap Value, the fund has been suffering shareholder redemptions for some time. Rather than permitting outflows to dictate investment decisions, Jensen has raised cash by selectively selling some holdings and trimming many others.
Weitz Partners Value WPVLX and Weitz Value WVALX
Weitz Partners Value and Weitz Value comanager Wally Weitz has long been known for his contrarian ways, so building cash as markets are moving higher and spending it when they move lower shouldn't surprise investors. Cash has been steadily on the rise here through 2011, and it sits at around 20% of assets in both funds as of the end of March 2012.
For the most part, Weitz has recently been selling or trimming holdings across the board, but there have been some notable changes in the past couple of years. More specifically, financial stocks aren't as prevalent as they once were. (Some of the funds' financials were the main culprits in the funds' weak 2008 showing.) Instead, Weitz has opted for some more-stable large caps as well as technology stocks, reflecting the influence of comanager Bradley Hinton.
Longleaf Partners LLPFX
Although the current cash stake in Longleaf Partners, 9.9% of assets as of the end of March 2012, isn't as high as the others here, it's still notable. Longleaf Partners is known for being decisively opportunistic, and this increased cash level comes after it had fallen to nearly 0% at the end of 2011's summer. It's also up from 5.9% at the end of 2011.
Dramatic changes in cash levels here can come about in a couple of ways. In mid-2011, the managers were adding to a number of the portfolio's existing holdings. But the big jump in cash toward the end of 2011 came because the fund sold News Corp., which had been a near-5% position at the end of September 2011. With a 20-stock portfolio, the effects of such a sale (or an addition to the portfolio) tend to be pronounced.
Overall, it's difficult to draw firm conclusions about cash levels. Some managers have increased cash, some haven't, and some funds have yet to report cash levels in 2012. And digging deeper, investors can find mitigating circumstances that cloud what might first appear as a clear indication of a manager's viewpoint.
Further, while the funds above are all strong, long-term options whose propensity to keep cash has contributed to attractive risk-adjusted performance records, their managers may not always make the right choices. My colleague Russ Kinnel has studied a larger group of funds that make tactical use cash and found mixed results.