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These Bargain-Hunting Funds Are Ready to Pounce

For these value funds, cash is king.

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There are several reasons why fund managers might increase their fund's cash allocation. Some hold cash because they expect potential volatility ahead. Others, like  Fairholme's (FAIRX) Bruce Berkowitz, are value mavens who like to have dry powder on hand, enabling them to purchase mispriced stocks during market sell-offs. In a related vein, managers might hold cash in rising markets when bargains are hard to find.

That's a common predicament these days. As columnist Bearemy Glaser noted in this article, one recurrent theme throughout this year's Morningstar Investment Conference was a dearth of buying opportunities. Even though equities have endured a sharp sell-off during the past month, the market is still looking fairly valued overall, according to Morningstar's equity analyst team.

To seek out topnotch bargain-hunting value funds that are holding a portion of their assets in cash and could be in a good position to capitalize on periods of future market weakness, we turned to the  Premium Fund Screener. We started by filtering for domestic and international funds that are tucking away at least 15% of their portfolio in cash and invest the bulk of their assets in value stocks. On the fees front, we filtered out any load funds with expense ratios greater than the category average. Finally, we called up offerings with Analyst Reports available. When we eliminated institutional funds as well as multiple share classes of the same fund, the screener yielded multiple potential holdings, three of which we've highlighted below. Premium users can  click here to replicate the screen.

Esther Pak does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.