Saturday, January 10, 2009

Cash is King

While many mutual fund managers boldly charge into stocks regardless of market conditions, others have kept their powder dry by holding more in cash.

For some of these managers, stashing cash has proved a valuable defense against the economic downturn. For others, boosting cash was a prudent decision at a time when stock valuations were too rich for their liking.

Whatever the reason, such moves in many cases mitigated the steep losses that other funds suffered in 2008. Of the 50 best-performing U.S. stock funds that reported cash holdings last year, the average portion in cash was 22.9%, while the median amount was 15.4%, according to data from investment researcher Morningstar Inc.

"[Cash] is part of my bag of tools to help manage people's money prudently and safely," said Ralph Shive, manager of Wasatch First Source Income Equity Fund (FMIEX).

"Holding cash is part of my style, based on the business cycle," said Shive, who typically holds between zero and 5% in cash. "I'm looking forward to a time when I can put it back in. I think about it every week, but I'm not there yet. We've got some serious structural problems."

The manager of one of the country's better-performing funds decided in August 2007 to build cash positions.

Since then, said Monem Salam, deputy portfolio manager at Saturna Capital, which manages the Amana funds, not much new investor money has been put into stocks.

There are still some warning signs for the markets and the economy, Salam said, including whether financial institutions have finished writing down assets, how large the U.S. deficit will be and the scale of job losses.


[By Sam Mamudi, MarketWatch]

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