The surging stock market means some mutual fund managers are trying to sell high. They’re cashing in their winners and waiting to see if prices will fall before buying again.
If they’re right, they will have protected their investors and have more cash to buy bargain-priced stocks. If they’re wrong and stocks keep rising, their investors will miss out on the gains.
The Villere Balanced fund (VILLX), for example, keeps 15 percent of its $877 million in cash, according to Morningstar. It has posted an average 12 percent annual return over the last five years, putting it in the top 1 percent of its category, and it has exited completely from some of its winning stock picks, such as Carnival (CCL).
On average, fund managers have 4.6 percent of their portfolios in cash, according to a survey done earlier this month by Bank of America Merrill Lynch. That’s up from 3.8 percent in January.
Holding cash isn’t necessarily a red flag, says Todd Rosenbluth, the director of mutual fund and ETF research for S&P Capital IQ. Mutual funds have cash on hand to pay investors who pull money out of the fund.
Rosenbluth says he considers a fund to be fully invested if it has as much as 5 percent of its assets in cash. Once the amount surpasses 10 percent, he says investors should ask why and check to see if the fund has a history of holding on to cash at the right times.