Russel Kinnel is director of manager research for Morningstar and editor of Morningstar® FundInvestor℠, a monthly newsletter.
This far into a bull market, cash is unappealing. It's too hard for cash-heavy funds to keep pace with cashless indexes.
But, of course, that's some of its appeal. Cash provides defense, and it's dry powder to put to use in a down market. There are five Morningstar Medalists with big cash positions worth noting. Most funds with big cash stakes today hold a lot of cash most of the time.
has a 20% cash stake, which is near its high end but not too far off course, as it has held around 15% to 21% for most of the past five years. The managers timed things beautifully in the last bear market as they got fully invested at the end of 2008. More recently, the big cash drag and their mix of quality value has held back returns relative to peers and the benchmark. Although some investors are redeeming the fund, it has followed a pretty consistent pattern during the past 20 years, in which it holds up well in downturns and gives some back in rallies. This seems like a decent time to get in.
has a much shorter track record, but like Yacktman and FMI Common Stock
, this fund won't buy stocks if it can't find enough trading at an appealing discount. Thus, the fund has about 19% in cash, near the high end of its historical range. Focused funds like Yacktman and FMI also benefit from the volatility-damping that cash brings to a portfolio with lots of stock risk. It makes the fund a little easier to own for the average investor. FMI International has been performing quite well lately despite the cash stake. That's partly because it hedges currency risk and the dollar has been surging. At some point, the dollar will fall and that cash stake may look like more of a burden, but the long-term appeal here is still strong. The fund announced plans to close at the end of April. (Note, the fund did, in fact, close at the end of April.)
Invesco Diversified Dividend
manager Meggan Walsh is much less of a cash hoarder than the rest of the funds mentioned in this space. Generally, she holds a single-digit cash position, but that figure hit 10% in late 2015 and today is up to 18%. Walsh cites a lack of attractive dividend-payers and a huge influx of inflows as causing the hike. I like that she is sticking to her discipline in buying dividend-payers with at least 35% upside from their purchase price. However, if the inflows and cash continue, it might be a good idea to close this $22 billion fund to new investors.
is mired in the biggest relative performance slump of any fund I'm discussing here. It has a 17% cash stake and bottom-decile returns for the past five years. Like some others here, though, it's a focused portfolio that has long held a lot of cash. The fund's cash stake peaked at 33% in 2013, so it's actually below-peak. That decline in cash coincides with a lowering of the bar. The fund cut the discount rate it uses to value companies to 9% from 12% because it wanted to buy more high-quality companies and they don't often trade cheaply enough. We took the fund's Morningstar Analyst Rating down a notch to Bronze as a result, but we still have faith in Wally and Drew Weitz's Buffett-influenced approach to a focused value portfolio.
is grounded in a value discipline and an emphasis on capital preservation. Put the two together and you get the fund's massive 41% cash stake. That's as high as it has ever been. It was last in the single digits in 2012. The fund remains closed to new investors.
Seeing so many of these disciplined value funds with near-peak cash certainly gives one pause about the current state of the market.