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Value Managers Keeping Some Powder Dry

Some managers will gladly keep assets out of the market as part of a broader strategy.

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One good test of active fund managers is whether they have the courage of their convictions, even when they lead in a different direction than their peers. Investors who choose actively managed funds typically do so because they want the person investing their money to have a deep understanding of the market and great instincts, knowing when to zig while others mistakenly zag.

A lot of attention is paid to where in the market a fund manager chooses to invest, but far less is paid to the decision about how much to leave in cash. Keeping money on the sidelines can be an important element of a value manager's strategy. Doing so has an obvious potential upside: plenty of liquidity available for jumping on a great opportunity, or protection if one expects the market to take a dive. But of course there's a downside, too, namely the opportunity cost of not having the money in the market at a time when it would have appreciated in value.

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Adam Zoll does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.