Prominent Funds Feel Bite from Big Cash Stakes

During the last few years the market was as likely to go down as up. That meant that fund managers didn't necessarily pay a price for raising their cash stakes. If the market went down, they were actually rewarded. But things have been different lately.

You've probably read about a number of value managers who have raised cash because they can't find anything attractive to buy. They don't want to violate their investment discipline and accept a smaller margin of error by paying up for a stock. It makes sense that managers should stick to their strategies, and if that strategy is about protecting against losses, then that's what they should do. You can't have maximum downside protection and get every last drop out of rallies at the same time.

But the downside of those moves have been on display lately. A sharp rally has left cash-heavy funds out in the cold. Sure, they've increased in value, but at a much slower rate than their peers. A number of funds have seen their relative performance fall sharply because of that cash anchor.

Value stalwarts  FPA Capital ,  Longleaf Partners (LLPFX), and  Clipper (CFIMX)boast cash stakes higher than 20% and are now in their categories' bottom 5% for the year to date.  Aegis Value (AVALX) and  Weitz Partners Value (WPVLX) have also fallen to the bottom 20% of their categories owing to cash stakes of 54% and 21%, respectively. Ouch.

Should you bail out on such funds? Not if you came in with your eyes open. These are funds that make it quite clear they will only invest when they find attractive opportunities. In a bear market they look like geniuses, but it's times like now that test shareholders' patience. Its worth remembering that these managers aren't trying to time the market; they're just making sure they get a good value when they invest.

About the only one on the list that's been disappointing is Aegis Value. That fund's huge cash stake has as much to do with management's reluctance to close the fund to new investors as its desire to find holdings with an acceptable margin of safety.

Having Your Cake and Eating It, Too
Surprisingly, I did spot one fund with a big cash stake and strong returns. At  Third Avenue Small-Cap Value  (TASCX), manager Curtis Jensen has led the fund to a nifty 19.4% return. To be sure, he was well behind most small-cap funds during the November rally, but he's had enough big winners this year that the fund still looks strong. Why? In a word, Kmart . The stock surged even before it announed a merger with Sears. In addition, he owns a lot of natural-resource stocks, such as energy firms and timber companies, which have enjoyed a big rally.