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All That Cash -- And Nowhere To Go


Veteran Value Fund manager Robert L. Rodriguez is sitting on a wad of money. Some 36% of his $1.6 billion FPA Capital Fund Inc. (FPPTX) and 25% of his $1.9 billion FPA New Income Fund Inc. are parked in cash. And Rodriguez isn't the only investor on the sidelines. With the stock market once again climbing and share valuations much higher than a year ago, a host of seasoned, price-conscious managers are piling up cash rather than buying stocks. "We're glorified money-market managers," laments Rodriguez.

So-called deep-value managers, who make a living by scouring the market for stocks selling at big discounts to what they figure the companies are worth, have the thickest wads. Big players such as the $7.4 billion Clipper Fund (CFIMX), the $8.4 billion Longleaf Partners Fund (LLPFX), and the $4.3 billion Weitz Value Fund (WVALX) each have more than 20% in cash. A major factor behind the buildup: a lack of stock market volatility, in particular the dips that value players rely on to pick up stocks cheap. As of Nov. 23, there hasn't been a single day this year when the Standard & Poor's 500-stock index fell or rose by more than 2%. Last year the index experienced 15 such swings.

Today's high cash levels are leading some value-oriented funds into uncharted territory. Steven Romick's $840 million FPA Crescent Fund Inc. (FPACX), which invests in equities and high-yield bonds, typically has about 14% in cash. Now, Romick's cash stake has soared to 45%. That's the highest it has been since 11 years ago, when the ratio was thrown out of whack by a huge inflow of investor money in one quarter. Longleaf Partners' cash, too, is unusually high at 26%. The last time the fund approached today's cash levels was in March, 2002, when it hit 20%. Clipper's cash hoard has doubled, to 20%, since 2002.

With cash levels at some funds hitting historic highs, value managers are closing their funds to new investors rather than risk hurting their performance and current shareholders. Longleaf Partners and FPA Capital have been shut since July. Romick says he'll close his fund when assets hit about $1 billion. "We're not going to keep taking cash ad infinitum and not put it to work."

STUCK IN NEUTRAL

Indeed, the pickings have been slim. FPA Capital's Rodriguez built a small position in furniture and appliance rental chain Rent-A-Center (RCII) recently. At Weitz Value, analyst Bradley P. Hinton says the fund found a few "unique opportunities" such as drug distributor Cardinal Health (AH) during a brief part of the summer, but has been trimming other positions as the market has rallied. Clipper's James Gipson, who notes that there were many more underpriced stocks in 2002, thinks the market is now in a neutral period. Says Gipson: "There's a remarkable lack of reasons to buy or sell."

The bond market isn't providing much relief for managers who can venture outside of stocks. After hitting historic lows in late 2002, high-yield bonds look pricey, says Romick. Rodriguez echoes that sentiment. He expects the 10-year Treasury to hit 5.5% to 6% within five years -- up from 4.2% now. So he is buying only short-term bonds for FPA New Income, his intermediate bond fund, to avoid a big hit from rising interest rates. The average bond in Rodriguez' fund now has a maturity of just 1.5 years.

If volatility does pick up and better values emerge, all that cash will give the value players enormous buying power. "I wish Mr. Market would get drunk and have a bad fall so that psychology and investor enthusiasm would get very depressed," says Rodriguez. "That will make us very happy campers."

He isn't banking on it, though. He figures that his cash will be higher in mid-2005. If so, he may need to settle into life as a glorified money market manager.

By Suzanne Woolley in New York


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