Yet many top fund managers routinely keep 10 percent or more out of the market and on the sidelines.
They may have good reasons for doing so. One common rationale: If a favored stock falls in price, a fund manager with a cash cushion can draw on those reserves to snap up the stock quickly.
“To be fully invested today is to assume there will be no better deals tomorrow,’’ says Mark Travis, comanager of the Intrepid Small Cap Fund. “And I’ve never operated under that assumption.’’
But cash can become a lead weight on a portfolio in a rising market. And all told, the market is up 9 percent for the year.
Consider the year-to-date numbers for Intrepid Small Cap and two other currently cash-heavy funds, all with 5-star ratings from Morningstar because of superior long-term returns:
■Forester Value is up 4 percent, trailing 99 percent of its peers specializing in large value stocks.
■Intrepid Small Cap is up nearly 16 percent, yet trails nearly 80 percent of its small-blend peers. The fund category is faring better than most because small company stocks are performing well.
■Osterweis is up nearly 8.5 percent, lagging 95 percent of its mid-cap blend peers.
Each of the managers acknowledged a key reason they’re lagging is their cash position: about 19 percent at Forester Value and Intrepid Small Cap at the end of September; and nearly 16 percent at Osterweis.
Those cash positions are around six times the average for all US stock funds, according to Morningstar.
Despite their recent back-of-the-pack results, managers at these three funds don’t have regrets about keeping so much money on the sidelines. Their explanations help illustrate why investors shouldn’t necessarily dismiss funds that are cash-heavy in a rising market:
■Tom Forester, Forester Value Fund:
When Forester is nervous about stocks, there’s good reason to pay attention. His fund was the only US stock fund to finish 2008 with a gain — it essentially broke even, up 0.4 percent — amid a market collapse that caused nearly every other fund to post double-digit losses. Many of his stocks were defensive picks that avoided major trouble.
