To most fund managers, cash is not king. Cash is a cardinal sin. Worse, it's a confession that the stock market is winning and these guys don't like advertising that fact. They reason that buying stocks defines their livelihood, so holding a substantial cash position in a stock fund is regarded as shirking their responsibilities, even if it means buying doesn't make a whole lot of sense. And, like the investors they serve, they crave the action.
Even if they think it's prudent to stash a wad of cash in their portfolios in a pricey market, many don't have the guts to do so. If they're caught holding more than 10 per cent cash in their portfolios, they risk having a rebellion on their hands from antsy clients who protest that they are paying these hired hands to put their cash to work.
Even with the long-term bullishness of the Canadian market, cash still isn't getting a whole lot of respect from money managers. Yet, there have been a few Canadian money managers with the conviction to buck the trend by carrying staggering weights of cash in their portfolios in recent months.
In this what-have-you-done-lately world of investing, you've got to admire the courage of a money manager who puts himself on the firing line by sticking to his discipline, keeping his powder dry and waiting for the home-run plays that a bear market might present - even if his short-term results aren't anything to write home about.
One such money manager trumpeting cash as king these days is Ross Healy, who ranks as one of Bay Street's most respected pundits.
And he makes no apologies for this conservative stance.
"We're being very defensive and we're holding a lot of cash (about 40 per cent)," says the snowy-haired CEO of Strategic Analysis Corp.
Healy, a stickler for value investing who doesn't see much value in the current market, says he has been increasing the cash position in his Accumulus Talisman Fund, which started the year with a cash weighting of about 30 per cent. And he anticipates raising even more cash down the road.
"I think a good element of cash is really critical in one's portfolio going forward," quips Healy, and he gives the impression that his economic outlook is even grimmer than he will let on. When Healy was asked recently for his top stock picks for the Edge, it was akin to pulling teeth. Eventually, under intense interrogation and arm-twisting, he surrendered three choices - a short-sell special, an old mainstay oil stock and a fat dividend play (see Pro's 3 Stars on Page 12).
But Healy's not alone in striking a defensive posture in a game dominated by offensive playbooks.
A handful of Bay Street veterans have been confessing to hoarding cash as a strategic asset, among them grizzled veterans such as David Burrows of Rockwater Asset Management, who manages the Disciplined Leadership funds, and Francis Chou, the unheralded manager of the Chou funds who boasts a spectacular track record.
Healy hasn't exactly been shooting out the lights in the recent commodities-powered bull market with his cash-rich portfolio. The Talisman large-cap fund was down marginally through the first six months of this year, with a loss of 0.6 per cent. That pales alongside a positive return of 4.2 per cent by the S&P/TSX Composite Index.
Yet, after almost four decades in the investing game, he's not about to lose sleep over short-term results.
Healy sounds like a man bracing for a hellish hurricane. Hence, he's banking on leveraging a strong cash position in the event of a nasty bear market that he believes may be looming not so far off in the distance. He believes the TSX is especially vulnerable to a bear market bloodletting because of its disproportionate weighting in commodities-driven stocks, including about a 30-per-cent weighting in energy stocks.
His concerns over the economy are rooted in a U.S. real estate market that has begun to crumble and, in his opinion, could lead the U.S. into recession.
"I think the odds of a nasty real estate setback in the States is so high that it's just frightening," says Healy. "I wouldn't want to own U.S. real estate at this juncture to save my soul. This is going to be very unpleasant and it's going to hurt the consumer sentiment badly. It's unavoidable and if the consumer lets go, we've got a recession for sure. The situation is not as bad in Canada. We don't see the same horrendous (real estate) speculation here (in Canada) that we do south of the border."
At Rockwater, the nasty May stock market correction resulted in cash positions rising as high as 80 per cent, as stock holdings in the company's funds sold off when they hit the stop-loss orders that are designed to bullet-proof the portfolios from severe losses. In a recent conference call with clients, Burrows, Rockwater's market strategist, said he was cautiously moving some of the cash back into the market but suggested he was still patiently awaiting the all-clear signal.
"We think it's our job to err on the side of caution," Burrows said on the conference call (available at www.disciplinedleadership.com), emphasizing Rockwater's attention to preservation of capital. "We will continue to follow the strategy that we've followed over the last 15 years."
Chou is also known for loading up on cash when he deems the market to be frothy. Yet, that hasn't exactly hindered his ability to wildly outperform the market. The Chou Associates Fund, one of a basket of funds managed by Chou, boasts a stunning compounded return of approximately 16 per cent a year over the past 24 years.
Chou, an enigmatic Bay Street star, is obviously not turning cartwheels over the current stock market, particularly the TSX. Through June, the Chou Associates fund had a cash position of 25.9 per cent and a meagre 9.1-per-cent weighting in the Canadian market.
According to Peter Grandich, publisher of the U.S.-based Grandich Letter, the May correction may have only been the initial blow in a prolonged slump for the S&P/TSX Composite. That index recently traded just under the 12,000 plateau and Grandich suggested he would remain bearish unless the index recorded a convincing close above the key resistance level of 12,000.
"I think Canada's major markets are in for a serious correction on the heels of an (economic) slowdown in Canada and the U.S.," wrote Grandich in a recent alert to subscribers. "Bottom line: While Canada as a whole is clearly moving in a much better direction fiscally and economically than the neighbouring U.S., the fact that it remains strapped to Uncle Sam's hip trade-wise is likely to become a drag as we get into 2007 and beyond."
On that count, you won't get much of an argument from those cheapskate money managers hiding in their bunkers with their cash hordes and crash helmets.
However, if by chance they're still holed up in the bomb shelters a year from now and bulls are still raging on Bay Street, they will have some serious explaining to do.
* SAGE WORDS: "Most mutual fund writers write an economic forecast of some sort which is both boring and wrong. I'd rather be lively and wrong."
- Ralph Wanger, a legendary fund manager renowned for his creative writing.
(Gyle Konotopetz can be reached at email@example.com)