Contrarian Calls on Cash-Heavy Funds

12/24/2014 8:00 am EST

Focus: FUNDS

Russel Kinnel

Editor, Morningstar FundInvestor

Funds with big cash stakes can lag in rallies, but I wouldn’t pull the trigger on a good fund just for a bit of a slump, notes contrarian investing expert Russel Kinnel in Morningstar FundInvestor.

Indeed, funds with big cash stakes can do wonders in a downturn. It goes beyond the cash stake itself.

Cash holders have a certain extra level of choosiness about their stocks and a wariness of losses that is reflected in the way the rest of the portfolio is run.

It also is something that can be put to use in selloffs, though I wouldn’t go so far as to expect these managers to time their purchases perfectly.

FPA Crescent (FPACX) is a prime example. Steve Romick has an awesome track record with great returns despite copious amounts of caution.

The fund has 43% of assets in cash today. With 21 years at the helm, you can trust that Romick knows what he’s doing. Romick’s a careful stock-picker who will make some unusual investments if he sees an opportunity.

The fund has invested in a California mall and even container ships—not companies that own a mall and container ships but the actual things.

Those are small parts of the fund that will have only a tiny impact on performance, but it shows how creatively he approaches investing.

Wally Weitz lives in Omaha, Nebraska, and he tries to invest like fellow Omaha native Warren Buffett. So, it’s no surprise that Weitz Partners Value (WPVLX) and Weitz Hickory (WEHIX) are sporting cash positions of 25% and 20%, respectively.

Wally Weitz and co-managers Brad Hinton and Andrew Weitz sold into the market rally in the first half of 2014, giving the funds a big pile-o-cash.

But they’ll reinvest only where they see stocks trading at sizable discounts to their estimates of intrinsic value. They put cash to use wisely after the market dip in 2011 and the market free-fall in 2008.

Third Avenue Real Estate Value (TAREX) managers Michael Winer and Jason Wolf hold cash in a category where nearly every fund is fully invested in an attempt to maximize yield.

Specifically, cash has risen to 20% recently. They emphasize capital appreciation and preservation over income, however. They are very stingy about spending money on stocks that look pricey, so they let cash build.

They also tend to invest in real estate operating companies rather than REITs, because such companies can reinvest in property and they also tend to trade at more-modest valuations than REITs. We give the fund a Morningstar Analyst Rating of Gold.

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