These Bargain-Hunting Funds Are Ready to Pounce
For these value funds, cash is king.
For these value funds, cash is king.
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.
Appleseed (APPLX)
For this fund, holding cash is a residual of its strict bottom-up process. Management holds fast to a socially responsible investing mandate, focusing on firms that advocate social and environmental sustainability in their business practices. They also insist that firms have sound fundamentals and minimal downside risk; if they can't find enough compelling opportunities, they'll hold cash. Given management's exacting strategy, concentrated portfolio, and propensity to hold cash, it's not surprising that the fund's performance has diverged significantly from its mid-cap value peers. Although the fund's defensive positioning landed it in the category's basement in 2010, its performance since inception remains strong.
Delafield Fund
As is the case at Appleseed, this fund's managers, Dennis Delafield and Vincent Sellecchia, employ exacting criteria and will hold cash when undervalued names are scarce. As true contrarians, they focus on undervalued firms that generate plenty of free cash flow but are flying under the market radar because they're undergoing a transition, such as a reorganization or management change. Delafield and Sellecchia have recently been finding a dearth of such opportunities; the fund's current cash stake is at about 18%. That discipline has served shareholders well: The fund ranks at the top decile of its category for all trailing long-term time periods. Although the fund's penchant for large sector bets within a relatively concentrated portfolio courts risk, Delafield Fund is a compelling choice as a supporting player in a portfolio.
Forester Value (FVALX)
Like the skippers of the aforementioned funds, manager Tom Forester is a true bargain-hunter: He focuses on cheap stocks but not at the expense of rock-solid fundamentals and good competitive positions and growth prospects. Currently, however, he is more concerned about maintaining good downside protection than upside potential. And the portfolio reflects Forester's growing concern about rising interest rates and inflation. The fund has a heavy emphasis on stocks in the consumer defensive and health-care sectors, and more than 20% of the portfolio is sitting in cash. This is not the first time that Forester has taken to a decidedly cautious approach; the fund managed to keep itself out of the red during 2008's bear market due to its significant cash stake. Investors seeking a disciplined fund that has achieved an admirable long-term record while keeping a tight lid on risk have a lot to like here.
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