As stock markets flirt with record highs, steep prices make this a seller's market with few bargains, they say
Wally Weitz, the mutual-fund manager who beat 90% of rivals in the past five years by buying stocks he deemed cheap, calls bargains so scarce these days that he's letting his cash holdings swell.
“It's more fun to be finding great new ideas,” said Mr. Weitz, whose $1.1 billion Weitz Value Fund (WVALX) had 29% of assets in cash and Treasury bills as of Sept. 30. “But we take what the market gives us, and right now, it is not giving us anything.”
Mr. Weitz, whose cash allocation is close to the highest it's been in his three-decade career, joins peers Donald Yacktman and Charles de Vaulx in calling bargains elusive with stocks near record highs. They're willing to sacrifice top performance for the safety of cash as stocks rally for a fourth year in five.
The mutual fund managers' comments echo private-equity executives Leon Black and Wesley Edens, who say steep prices make this a seller's market. Hedge-fund manager Seth Klarman is returning some client capital to keep assets in check.
The average amount of cash in U.S. equity funds increased to 5% as of Aug. 31, from 3.7% a year earlier, according to data from Morningstar Inc. That's against the backdrop of the S&P 500's 23% rise in 2013. It reached new peaks this month in the wake of the congressional agreement to end the partial U.S. government shutdown.
Some fund investors frown upon equity managers who sit on large piles of cash, saying they prefer that stock pickers stay off the sidelines.
“We hire them to run stocks, not time the market,” said Richard Charlton, chairman of NEPC LLC. Mr. Charlton's firm advises clients with $748 billion in assets.
Value managers, who look for stocks that are cheap compared with a company's earnings prospects, have built up cash in previous periods, including the run-up to the financial crisis in 2007 and 2008, said Russel Kinnel, director of mutual fund research at Morningstar. U.S. value funds returned an average of 26% this year through Oct. 23, according to Morningstar, compared with 28% for growth funds, whose managers try to identify companies that will boost sales and earnings faster than competitors.
Most of the cash-heavy managers contend their decisions are based on individual stock prices, not any attempt to call a market top.
DROP NEEDED
“We will need prices to be down 15% to 20% for us to put most of our cash to work,” Mr. De Vaulx, co-manager of the $9.2 billion IVA Worldwide Fund (IVWAX). The fund, which outperformed 54% of competitors in the past five years, had 31% of its assets in cash and equivalents as of Sept. 30, according to its website.
The situation was different at the depths of the global financial crisis. Mr. Weitz's Value Fund had 7.8% in cash at the end of 2008, regulatory filings show.
“It was a wonderful time,” he said. “There was so much to buy.”
The S&P 500, after sinking to a 12-year low of 676.53 in March 2009, has soared above 1,750. The U.S. benchmark index traded at a price-earnings ratio of about 11 at the bottom. Today, the ratio is 17.
As Mr. Weitz's cash pile grew — and markets rallied — his fund beat 52% of peers this year. It outperformed 83% in the past three years, according to data compiled by Bloomberg. His biggest holding, Valeant Pharmaceuticals International Inc. (VRX), has almost doubled in U.S. trading.
'DIFFICULT TIME'
Mr. Yacktman, 72, president of Yacktman Asset Management Co., trailed 60% of rivals this year and 82% in 2012 at his $11.4 billion Yacktman Focused Fund, according to data compiled by Bloomberg. The fund, whose cash level rose to 21% as of Sept. 30, from 1.4% at the end of 2008, bested 92% of competitors in the past five years.
“We are having a more difficult time finding bargains,” Mr. Yacktman wrote in an e-mail.
Cash is a heavier burden for some managers.
Eric Cinnamond beat 99% of his rivals at the Intrepid Small Cap Fund (ICMAX) in the almost five-year period through August 2010 that he ran the fund, Morningstar data show. His current fund, the $696 million Aston/River Road Independent Value Fund (ARIVX), trails 99% of its competition this year as cash and equivalents have grown to 64% of assets, according to the fund's website and data compiled by Bloomberg.
“If we can't find value, we just don't invest,” said Mr. Cinnamond, 42, a vice president at River Road Asset Management. He called small-cap stocks “very expensive” and said investors are mistaken to value companies based on unsustainable profit margins.
Jayme Wiggins, his successor at the $711 million Intrepid Small Cap, is in similar straits. The fund, which had almost 59% of its holdings in cash as of Sept. 30, underperformed 97% of rivals in the past three years, according to data compiled by Bloomberg.
“We can't manufacture a good idea,” Mr. Wiggins told his shareholders in an April letter.
Mr. Wiggins, a vice president at Intrepid Capital Management Inc., said he is suspicious of stock prices lifted by the Federal Reserve's low interest-rate policies. “We are not speculating by hopping on the Fed's market bandwagon,” he wrote.
'MANIPULATED' ENVIRONMENT
Steven Romick, managing partner at First Pacific Advisors, took a similar stance in his second-quarter letter to shareholders of the $14.1 billion FPA Crescent Fund. (FPACX)
“We find it difficult to invest in an environment that seems manipulated to engineer higher asset prices regardless of business fundamentals,” Mr. Romick wrote.
The fund, which outperformed 68% of rivals over the past three years, had 40% of its assets in cash and short-term securities as of Sept. 30, according to FPA's website.
“Some managers have a good record of building up cash at the right time,” said Steven Roge, a money manager with R.W. Roge & Co., which oversees $200 million. “Romick is one of them.”
The Crescent Fund beat 97% of peers in the 2008 bear market, when the S&P 500 tumbled 38%. The fund had more than a third of its assets in cash equivalents as of March 31 that year, filings show.
Mr. Klarman, 56, the value-oriented investor who founded the $29 billion Baupost Group, has long advocated holding cash when markets are pricey and bargains scarce.
The manager, who had 30% to 35% of his assets in cash as of mid-September, has told investors he will return some money at the end of the year, spokeswoman Diana DeSocio wrote in an e-mail. Mr. Klarman has previously pledged to keep Baupost's assets at $20 billion to $25 billion.
“It's a difficult environment to find really attractive things when the markets are robust as they are,” Mr. Edens, head of the $14.3 billion private-equity business at Fortress Investment Group (FIG), told investors on a conference call in August.
“It is a fabulous environment to be selling,” Mr. Black, 62, chief executive officer at Apollo Global Management (APO), said at an investment conference in April. “We're selling everything that is not nailed down.”
Private-equity managers tend to focus on assets they consider undervalued or distressed, holding back from deals or mainly selling when values become elevated.
Apollo Global oversaw $113 billion as of June 30. The S&P 500 Index has climbed 9.7% since Black's comments.
For now, the mutual-fund managers holding cash are standing firm.
“Our performance has been rough,” Mr. Wiggins said. “But we think small-cap stocks are a dangerous place to invest.”
“We are wrong right now,” said Mr. Cinnamond. “It always feels this way at the peaks.”
(Bloomberg News)
