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Lewis Braham: Cash Is King—And A Harbinger Of Doom?
@Lewis From what source are you culling these facts? Thx.
Of 2,258 diversified U.S. equity funds, only 111 have 10% or more in cash—and their recent performance has been poor. Just 18% of those with five-year records have beaten their peers as of Feb. 10. Go back 15 years to include the 2008 crash, and the outperformance number jumps to 48%.
“Some big-name value managers—including Stephen Yacktman and Joel Tillinghast—have been wary of stock valuations ...“ / Actually, some (perhaps not so big name) posters at MFO have pretty much been saying the same thing for a while now.
Food for thought by John Greenleaf Whittier (later rephrased by Kurt Vonnegut): For of all sad words of tongue or pen, The saddest are these: "It might have been!"
Sounds like a good article from Lewis. Currently receive print copy of Barron’s and will get to it soon. (Date of edition?)
Lewis From what source are you culling these facts? Thx.
Of 2,258 diversified U.S. equity funds, only 111 have 10% or more in cash—and their recent performance has been poor. Just 18% of those with five-year records have beaten their peers as of Feb. 10. Go back 15 years to include the 2008 crash, and the outperformance number jumps to 48%.
You can do a similar search using M* premium, though my impression is that the M* Direct database is a bit larger than the "retail" database.
For "diversified U.S. equity funds", screen on category = U.S. equity (all) Applying "distinct portfolio only" here shows 2116 funds, a bit less than Lewis' 2,258.
Next, add the screen: portfolio composition (%cash) ≥ 10% This gives 122 distinct funds (curiously more than Lewis's 111, though off a smaller base).
Next, add the screen: trailing returns (5 year) not equal to "not available" This eliminates funds without five year records, and leaves 88 funds.
To see many beat their peers' average, add: trailing returns (5 year) > category average There are 29 such funds (33%).
Alternatively, one can see how many were above their peers' median, add: trailing returns % (5 year percentile) < 50
There are 22 such funds (25%). The ones that beat their category average but were below the median are: MARNX, HHDFX, LLSCX, SLCAX, STMSX, WEMMX, TORYX.
You can substitute 15 years for 5 years in the above screens and get: 52 funds with 15 year records, of which 26 (50%) were above their peers' median, while 25 (48%) beat their peers' average.
RGFAX beat the midcap blend average, not the median, while ADGAX and AMCPX beat the large cap growth median but not the LCG average.
While playing around with these numbers can be fun, as Lewis described what's important is why the funds hold so much cash.
@MSF Some of the funds that show up with an ordinary screen are index funds themselves or smart beta funds that hold weird cash positions while using derivatives to get full stock exposure. In fact, online for instance a number of Pimco enhanced index funds show up like PIMCO StocksPLUS® Instl PSTKX, even though technically it has a large negative cash position. Those funds need to be eliminated. But also for various reasons there are some differences between the online database and Morningstar Direct.
Cash may be King for short periods of time; but, held for longer periods of time it will become trash as purchasing power deminishes (over time) due to inflation. Folks, my strategy has been a simple one. I (and my family) have invested in appreciating assets through our years. Thus, we have bettered inflation. Plus, we banged a few bucks out of some short term (spiff) strategies. But, our big gains have come by being invested through the years.
My principal residence is worth more than 30 times what it cost my family in the mid 60's. My investments as measured by a stock and bond fund (bought in the mid 60's.) has grown by more than 80 times by what was first invested. As a measure of inflation creep a gallon of gas that cost 20 cents to 30 cents per gallon back in the 60's now cost around $2.50 per gallon and at times about doubble that.
So, hold cash if you wish believing that it is King. For me, it is not. However, I feel it reasonable to hold a certain amount of cash ... say 8% to 12% of net worth. With this, it seems reasonable for a mutual fund to hold 8% to 12% of it's assets in cash as well. After all, cash is an asset class.
Though let me start by saying that I was simply suggesting how one could "roll one's own" and come up with similar aggregate figures. Since the results are aggregate, a modest measure of noise doesn't affect the conclusions. On the other hand, if I had been doing a screen like this for my own purposes, I would have carefully inspected each fund (not hard to do that with a just a score or two that passed the final screen).
M* treating negative numbers (large shorting of cash) as positive numbers is something I was aware of. M* might argue that this is a feature of its premium screener, one (In the screen, M* offers 0% as the lowest possible allocation.) I regard it as a bug.
Weird cash positions - as you noted, this is often due to extensive use of derivatives. That automatically makes all PIMCO funds suspect and deserving of closer inspection. A non-PIMCO example would be MetWest Alpha Trak 500 MWATX. While it's true that the reason that these funds hold cash is because of how they're structured as opposed to a strategic purpose, they are nevertheless "cash rich" funds as you defined them (>10% current cash, for whatever reason). Were these funds excluded from the tally of funds holding lots of cash?
Index funds, at least vanilla index funds, can be eliminated by with the additional screening condition: Special fund type (index fund) = No
While index funds obviously don't hold lots of cash for strategic purposes, they, like funds with derivatives, nevertheless may be deceptively cash rich. So the same question arises here: were these funds excluded from the tally of funds holding lots of cash?
Looking at USAA index funds like USSPX and USMIX, one sees a single short position (not cash or stock or bond), and a cash position just slightly greater in magnitude. In other words, these index funds hold a percent or so of "real" cash. The rest is just the proceeds of the short. So the data issue here may be one of shorts (or derivatives), and not a question of whether index funds are passing the screens.
There was definitely some qualitative pruning that needed to be done to come up with actively managed funds--no indexers or enhanced indexers--to find funds where cash was for strategic purposes of active management. Also, the way Morningstar Direct screens for cash is different from the online database as Direct allows you to screen for net cash positions as opposed to long cash positions, which I am fairly convinced now the online screener uses as why else would funds with negative cash positions come up? In the case of Pimco StocksPlus it is shorting more cash than it's long but a screen of greater than 10% cash includes the fund. It is the net cash position--long plus short--that matters, but so does the intent of the cash use and active management itself. To write about why enhanced index funds and index funds also sometimes hold cash could be a separate story in itself. Anything involving derivatives, long and short positions usually requires its own story. But clearly the "managers" of those computerized index or quasi-index funds aren't holding cash for valuation or defensive reasons.
Comments
Of 2,258 diversified U.S. equity funds, only 111 have 10% or more in cash—and their recent performance has been poor. Just 18% of those with five-year records have beaten their peers as of Feb. 10. Go back 15 years to include the 2008 crash, and the outperformance number jumps to 48%.
Food for thought by John Greenleaf Whittier (later rephrased by Kurt Vonnegut): For of all sad words of tongue or pen, The saddest are these: "It might have been!"
Sounds like a good article from Lewis. Currently receive print copy of Barron’s and will get to it soon. (Date of edition?)
For "diversified U.S. equity funds", screen on category = U.S. equity (all)
Applying "distinct portfolio only" here shows 2116 funds, a bit less than Lewis' 2,258.
Next, add the screen: portfolio composition (%cash) ≥ 10%
This gives 122 distinct funds (curiously more than Lewis's 111, though off a smaller base).
Next, add the screen: trailing returns (5 year) not equal to "not available"
This eliminates funds without five year records, and leaves 88 funds.
To see many beat their peers' average, add: trailing returns (5 year) > category average
There are 29 such funds (33%).
Alternatively, one can see how many were above their peers' median, add:
trailing returns % (5 year percentile) < 50
There are 22 such funds (25%). The ones that beat their category average but were below the median are: MARNX, HHDFX, LLSCX, SLCAX, STMSX, WEMMX, TORYX.
You can substitute 15 years for 5 years in the above screens and get:
52 funds with 15 year records, of which 26 (50%) were above their peers' median, while 25 (48%) beat their peers' average.
RGFAX beat the midcap blend average, not the median, while ADGAX and AMCPX beat the large cap growth median but not the LCG average.
While playing around with these numbers can be fun, as Lewis described what's important is why the funds hold so much cash.
My principal residence is worth more than 30 times what it cost my family in the mid 60's. My investments as measured by a stock and bond fund (bought in the mid 60's.) has grown by more than 80 times by what was first invested. As a measure of inflation creep a gallon of gas that cost 20 cents to 30 cents per gallon back in the 60's now cost around $2.50 per gallon and at times about doubble that.
So, hold cash if you wish believing that it is King. For me, it is not. However, I feel it reasonable to hold a certain amount of cash ... say 8% to 12% of net worth. With this, it seems reasonable for a mutual fund to hold 8% to 12% of it's assets in cash as well. After all, cash is an asset class.
I wish all ... "Good Investing."
Old_Skeet
Though let me start by saying that I was simply suggesting how one could "roll one's own" and come up with similar aggregate figures. Since the results are aggregate, a modest measure of noise doesn't affect the conclusions. On the other hand, if I had been doing a screen like this for my own purposes, I would have carefully inspected each fund (not hard to do that with a just a score or two that passed the final screen).
M* treating negative numbers (large shorting of cash) as positive numbers is something I was aware of. M* might argue that this is a feature of its premium screener, one (In the screen, M* offers 0% as the lowest possible allocation.) I regard it as a bug.
Weird cash positions - as you noted, this is often due to extensive use of derivatives. That automatically makes all PIMCO funds suspect and deserving of closer inspection. A non-PIMCO example would be MetWest Alpha Trak 500 MWATX. While it's true that the reason that these funds hold cash is because of how they're structured as opposed to a strategic purpose, they are nevertheless "cash rich" funds as you defined them (>10% current cash, for whatever reason). Were these funds excluded from the tally of funds holding lots of cash?
Index funds, at least vanilla index funds, can be eliminated by with the additional screening condition:
Special fund type (index fund) = No
While index funds obviously don't hold lots of cash for strategic purposes, they, like funds with derivatives, nevertheless may be deceptively cash rich. So the same question arises here: were these funds excluded from the tally of funds holding lots of cash?
Looking at USAA index funds like USSPX and USMIX, one sees a single short position (not cash or stock or bond), and a cash position just slightly greater in magnitude. In other words, these index funds hold a percent or so of "real" cash. The rest is just the proceeds of the short. So the data issue here may be one of shorts (or derivatives), and not a question of whether index funds are passing the screens.
I enjoy your work in Barrons.
Mitchelg