Strong Value Funds With Dry Powder

Investors often hear that they should be buyers in periods of market weakness, but that can be psychologically difficult to do in practice. What, they wonder, if the bad news that precipitated the decline keeps on coming, or gets even worse? The ability to stay disciplined during volatile markets is one of the best rationales for holding mutual funds rather than overseeing your own basket of securities.

Even if you own a simple balanced or target-date fund, part of the value proposition is that the fund is periodically rebalanced back to its target allocation--something that many investors have difficulty doing themselves. In a similar vein, if you own a fund run by a value-minded equity manager, the manager may relish the ability to buy stocks after they've been knocked down. Many such managers may, in fact, be holding cash right now. They're not enticed by stocks in a rising market, but they're waiting to pounce when their favorites go on sale.

To help home in on a short list of such offerings, I employed our Premium Fund Screener. I searched for value-oriented Morningstar Medalist funds that are currently holding cash stakes of more than 10% and are still open to new investors.

All of these funds have recently paid a price for their positioning: Among the seven offerings that cleared our screen as of Dec. 22, all of them have underperformed a total market index fund so far this year. The cash isn't the sole culprit for their weak relative returns; several emphasize small and mid-caps, which have trailed large, and two of the funds emphasize foreign stocks. Those biases have held them back this year, but could be a boon in a market correction.

Premium Members can click  here to run the screen themselves or tweak it to their own specifications. Here's an overview of some of the funds that made the cut.

 Artisan Value (ARTLX)
Category: Large Value | Analyst Rating: Silver | Cash position as of Sept. 30: 10.2%
While this fund has generated a nearly 6% return for the year to date through late December, that places it in the bottom 10% of the large-value category. Cash has been a drag in a rising market, but the fund's 18% stake in the lagging energy sector has also stung. To add insult to injury, fundamental changes are afoot for this offering: Comanager Scott Satterwhite announced earlier this year that he'll be retiring in September 2016. Senior analyst Greg Carlson acknowledges that Satterwhite's eventual departure will be a blow, as he founded the team in place here and has delivered fine long-term returns at  Artisan Small Cap Value since its launch in 1997. Nonetheless, Carlson believes the fund will be in good hands following Satterwhite's departure, as the remaining comanagers have nearly 50 combined years' worth of experience on the team. Carlson also points out that the fund's recently underwhelming performance isn't too worrisome, as it has a pattern of lagging in big market rallies.

 Diamond Hill Small Cap (DHSCX)
Category: Small Value | Analyst Rating: Gold | Cash position as of Nov. 30: 19.8%
Although this fund's absolute returns are worse than the Artisan fund's, its relative numbers are better: Through Dec. 20, its 3.6% gain lands comfortably in the small-value category's top half. Those decent relative returns are all the more impressive when you consider that cash has risen to nearly 20% of assets. The cash isn't a market call but rather an outgrowth of manager Tom Schindler's process: As small caps have rallied over the past five years, he has been unable to find enough companies trading at a reasonable discount to what he thinks they should be worth, and several holdings in the portfolio have hit his sell targets. Although the A shares of this fund are available through brokers, the I shares are available to do-it-yourself investors with a $5,000 minimum initial purchase. Senior analyst Janet Yang also notes that the fund may close sooner rather than later, as assets are approaching management's stated closing thresholds ($1.5 to $2 billion in total assets managed in this style).

 Vanguard Selected Value (VASVX)
Category: Mid-Cap Value | Analyst Rating: Gold | Cash position as of Sept. 30: 10.3%
This fund has a trio of value firms picking stocks: Longtime subadvisors Barrow Hanley and Donald Smith run the bulk of the portfolio, and Vanguard recently steered a portion of the portfolio to a third firm, Pzena Investment Management. Senior analyst Bridget Hughes says that each of the teams puts its own spin on value investing. The team at Barrow Hanley are traditional value investors who emphasize dividends and keep the portfolio fairly compact (the firm also runs the bulk of  Vanguard Windsor II (VWNFX)). Smith and company, meanwhile, look for companies trading cheaply relative to tangible book value, and are largely responsible for the outsized cash stake. Pzena's firm screens for companies that look cheap relative to historical normal earnings; within the cheapest 20%, it conducts bottom-up analysis to determine which are worthy turnaround candidates. Senior analyst Bridget Hughes says that the addition of Pzena's firm could bump up volatility a bit, but she has confidence in the other teams and their processes; ultralow costs give the fund a fighting shot at beating value benchmarks.