Weitz to Yacktman Hold Cash as Managers Find Few BargainsCharles Stein
Wally Weitz, the mutual-fund manager who beat 90 percent of rivals in the past five years by buying stocks he deemed cheap, says bargains are so scarce these days that he’s letting his cash holdings swell.
“It’s more fun to be finding great new ideas,” Weitz, whose $1.1 billion Weitz Value Fund had 29 percent of assets in cash and Treasury bills as of Sept. 30, said in a telephone interview from Omaha, Nebraska. “But we take what the market gives us, and right now it is not giving us anything.”
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 percent as of Aug. 31 from 3.7 percent a year earlier, according to data from Chicago-based Morningstar Inc. That’s even as the Standard & Poor’s 500 Index rose 23 percent in 2013 after reaching new peaks in the wake of last week’s 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,” Richard Charlton, chairman of Boston-based NEPC LLC, said in a telephone interview. 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 percent this year through Oct. 23, according to Morningstar, compared with 28 percent for growth funds, whose managers try to identify companies that will boost sales and earnings faster than competitors.
Most of the cash-heavy managers say their decisions are based on individual stock prices, not any attempt to call a market top.
“We will need prices to be down 15 to 20 percent for us to put most of our cash to work,” De Vaulx, co-manager of the $9.2 billion IVA Worldwide Fund, said in a telephone interview from New York, where International Value Advisers LLC is based. The fund, which outperformed 54 percent of competitors in the past five years, had 31 percent of 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. Weitz’s Value Fund had 7.8 percent in cash at the end of 2008, regulatory filings show.
“It was a wonderful time,” he said in the interview. “There was so much to buy.”
The S&P 500 Index, 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 Weitz’s cash pile grew while markets rallied, his fund beat 52 percent of peers this year. It outperformed 83 percent in the past three years, according to data compiled by Bloomberg. His biggest holding, Laval, Quebec-based Valeant Pharmaceuticals International Inc., has almost doubled in U.S. trading.
Yacktman, 72, president of Austin, Texas-based Yacktman Asset Management Co., trailed 60 percent of rivals this year and 82 percent in 2012 at his $11.4 billion Yacktman Focused Fund, according to data compiled by Bloomberg. The fund, whose cash level rose to 21 percent as of Sept. 30 from 1.4 percent at the end of 2008, bested 92 percent of competitors in the past five years.
“We are having a more difficult time finding bargains,” Yacktman said in an e-mail.
Cash is a heavier burden for some managers.
Eric Cinnamond beat 99 percent of his rivals at the Intrepid Small Cap Fund in the almost five years through August 2010 that he ran the fund, Morningstar data show. His current fund, the $696 million Aston/River Road Independent Value Fund, trails 99 percent of its competition this year as cash and equivalents have grown to 64 percent of assets, according to the fund’s website and data compiled by Bloomberg.
“If we can’t find value we just don’t invest,” Cinnamond, 42, a vice president at Louisville, Kentucky-based River Road Asset Management LLC, said in a telephone interview. 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 percent of its holdings in cash as of Sept. 30, underperformed 97 percent of rivals in the past three years, according to data compiled by Bloomberg.
“We can’t manufacture a good idea,” Wiggins told his shareholders in an April letter.
Wiggins, a vice president at Jacksonville Beach, Florida-based 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.
Steven Romick, managing partner at Los Angeles-based First Pacific Advisors LLC, took a similar stance in his second-quarter letter to shareholders of the $14.1 billion FPA Crescent Fund.
“We find it difficult to invest in an environment that seems manipulated to engineer higher asset prices regardless of business fundamentals,” Romick wrote.
The fund, which outperformed 68 percent of rivals over the past three years, had 40 percent 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 Bohemia, New York-based R.W. Roge & Co., which oversees $200 million. “Romick is one of them.”
The Crescent Fund beat 97 percent of peers in the 2008 bear market, when the S&P 500 Index tumbled 38 percent. The fund had more than a third of its assets in cash equivalents as of March 31 that year, filings show.
Klarman, 56, the value-oriented investor who founded the $29 billion Boston-based Baupost Group LLC, has long advocated holding cash when markets are pricey and bargains scarce.
The manager, who had 30 percent to 35 percent of his assets in cash as of mid-September, has told investors he will return some money at the end of the year, Diana DeSocio, a spokeswoman, wrote in an e-mail. 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,” Edens, head of the $14.3 billion private-equity business at New York-based Fortress Investment Group LLC, told investors on a conference call in August.
“It is a fabulous environment to be selling,” Black, 62, chief executive officer at Apollo Global Management LLC, 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, based in New York, oversaw $113 billion as of June 30. The S&P 500 Index has climbed 9.7 percent since Black’s comments.
For now, the mutual-fund managers holding cash are standing firm.
“Our performance has been rough,” Intrepid’s Wiggins said in a telephone interview. “But we think small-cap stocks are a dangerous place to invest.”
“We are wrong right now,” said River Road’s Cinnamond. “It always feels this way at the peaks.”