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Wednesday June 30, 07:13
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Longleaf Funds Managers Defend Their Pile of Cash
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They have stashed as much as a quarter to a third of the assets entrusted to them in money-market reserves, insisting that they won’t be stampeded into buying stocks or bonds at unattractive prices.
This cash serves notice, in effect, that the management has the courage to be cautious. It bucks a trend, established in the 1990s, toward a fully-invested-at-all-times philosophy of running mutual funds.
There’s a real risk involved, especially at a time when yields on money-market securities are near rock-bottom levels. Even if the Federal Reserve starts raising the overnight bank rate from 1 percent tomorrow, as is widely expected, it’s going to be a long time before anybody looks to the money markets again for generous payoffs.
``Clients often want to see activity as proof that a manager is earning his fee,’’ say managers Mason Hawkins and Staley Cates of the Longleaf Partners funds. ``Some clients might wonder why they pay a manager to sit still.’’
Hawkins, chairman of Southeastern Asset Management Inc. in Memphis, and Cates, the firm’s president, had good cause to address the subject in the latest quarterly report to Longleaf fund investors.
By Default
As of the end of the first quarter, according to Bloomberg data, the flagship $8.2 billion Longleaf Partners Fund had 24.6 percent of that money in cash. The $2.3 billion Longleaf Partners International Fund had a 26.7 percent cash position, and the $2.4 billion Longleaf Partners Small-Cap Fund 32.2 percent.
``Holding cash is not our goal,’’ Hawkins and Cates wrote. ``We are not making an asset-allocation decision. We are not making a bet against the market. Very simply, we have not found qualifying investments and we are unwilling to force it.’’
One often-quoted voice on this subject is hedge-fund manager Seth Klarman of Baupost Group LLC in Boston, who told Grant’s Interest Rate Observer, ``The opportunity set available today is not the complete opportunity set that should be considered. The opportunity set of tomorrow, which could be greater, narrower, or similar in scope but different in specifics from today’s, is a legitimate competitor for today’s investment dollars.’’
This kind of thinking isn’t in fashion among most modern mutual fund managers. At all stock funds, according to the Investment Company Institute, the liquid-assets ratio was just 4.3 percent at last report. Over the last seven years it has averaged just a shade above 5 percent.
Incentive System
``Many managers are paid based on returns relative to an index, not absolute, positive results,’’ Hawkins and Cates say. ``In a rising market cash drags performance, so the manager stays invested. Although shareholders have a greater risk of loss, the manager receives a higher bonus.’’
The rap for this shouldn’t fall entirely on the manager. Clients, notably brokers and investment planners, may demand that funds stay true to style descriptions such as large-cap growth, small-cap value and so forth.
A stock fund of any description can’t pretend to ``style purity’’ if it is part-money-market fund. Similarly, bond-fund investors who are interested primarily in income may feel deprived if their managers put a chunk of their money in lower- yielding money-market securities.
Rarely Right
In simpler times, many investors looked to their fund managers to time the markets for them, loading up on stocks near market bottoms and taking some money out near tops. With experience, however, came a general awareness that few investment managers, no matter how skilled, could hope to do this with any consistent success.
In the 1970s and ’80s, indeed, the stock-fund cash ratio came to be followed as a contrarian indicator -- bullish for the market when it was high, bearish when it was low.
Today, Hawkins and Cates say they still make no claim as timers. ``We have no idea what markets will do and we would not speculate with your capital or ours by betting on a market correction,’’ they wrote.
The Longleaf funds’ big cash position, they say, results from their selling stocks they regard as expensive and finding few bargains in which to reinvest the proceeds. From that simple logic comes the new cachet of cash.
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