A Large Cash Stake Doesn't Necessarily Make for a Low-Risk Fund

A big cash stake can offer a false sense of security.

One of the potential benefits of an actively managed fund that often keeps a big portion of its portfolio in cash is lower volatility in times of market stress. Of course, investors in these funds typically sacrifice some of the upside in rising markets because they're not fully invested.

They can console themselves, however, with the belief that they won't have as deep of a hole to climb out of after the coast clears. Plus, their managers may have been able put some of that cash to work opportunistically during the downturn.

Keeping a lot of powder dry, though, does not mean a fund is completely out of harm's way. Managers who tend to hold double-digit liquidity levels are often maverick investors who are willing to let their convictions rather than benchmarks or peer group averages drive position sizes and sector allocations. It's not unusual to see significant stock, sector, and geographic concentration in these funds, which can offset some risk-damping effects of holding cash. Here are four funds that have a lot of cash ballast but still court significant risks in their portfolios.

These managers aren't afraid to look out of step with their peers and relevant benchmarks. As a result, it's likely this idiosyncratic portfolio will take a hit at one time or another, regardless of the size of its cash stake. Indeed, the fund lost 6.0% in 2015 while it's prospectus benchmark, the Russell 2000 Index, fell 4.4%; errant energy and consumer discretionary picks hurt that year. The fund gets a Morningstar Analyst Rating of Silver because its high-conviction approach should deliver over the long term, but its often-massive cash stake can't be counted on to temper its boldness.

Gold-rated

Bronze-rated

Silver-rated

This fund is willing to depart from the pack and benchmark, though, by heavily overweighting smaller markets, such as Indonesia, the Philippines, and Thailand, and downplaying or shunning altogether larger Asian developing markets, such as China and India. That, plus the managers' focus on sustainable earnings growth, management quality, and valuations, can take some, but not all, of the edge off this portfolio. The fund lost less than its prospectus benchmark and peers in 2008 and 2015, for instance, but that still meant dropping more than 50% and 7%, respectively.

Managers who are willing to hold a measure of cash when opportunities are scarce can achieve competitive risk-adjusted returns over the long term, but they take their share of risks, too.