Liquid The fund returned 41% last year on an eclectic array of global investments, particularly in emerging markets. But for now, cash is king
It's a rare fund these days that's raking in cash. Among those few is Ivy Asset Strategy (WASAX), a "go-anywhere" fund owned by Waddell & Reed (WDR) that increased its assets by 81% in the first six months of this year, to $15.2 billion. The Overland Park (Kan.) fund, sold through brokers (with the requisite dizzying array of fee structures), is adding to that stockpile by some $50 million a day, according to Michael Avery, Ivy's chief investment officer and co-manager of the fund since 1997. In fact, for the first half of the year, Ivy was among the top 10 net gainers of cash, according to Morningstar (MORN).
The fund's flexibility seems to be a big draw in a tumultuous market: Its managers can buy stocks, bonds, metals, currencies, or just about anything else, whether in the U.S. or in international markets. And they're permitted to short. But what's really driving asset growth is the fund's 41.3% return last year. That eye-popping number has made Ivy Asset Strategy an easy sell for the brokers who distribute it. (The fund says there have been no changes in its distribution or marketing.) "Maybe we get too much credit for having a year like 2007," says Avery, who, along with co-managers Daniel Vrabac and Ryan Caldwell, has his own money invested in the fund. "But we seem to have weathered the storm better than anyone else." Through Aug. 21, the fund was up 17.4% for one year and 18.2% for the past five years.
Ivy racked up its 2007 gain from huge bets in emerging markets, especially in China, India, Russia, and Brazil, and from canny plays in global agriculture, such as Monsanto (MON) and Mosaic (MOS), a major producer of phosphate and potash crop nutrients. Yet for all of its flexibility, the fund isn't doing any fancy footwork these days. Instead, after riding China and other international markets up, Avery has gone defensive. At the end of June, cash had ballooned to 45% of assets, or $6.8 billion.
Avery expects asset allocation for the year to remain roughly 50% cash, 30% equities (with those positions hedged by shorting futures contracts on the Standard & Poor's 500-stock index and various international indexes), 12% gold, and 7% bonds. That cash stake is largely in Treasuries and commercial paper. "Our big job in this period of global weakness is not to blow up our investors," Avery says. "We know the sectors and industries and even the names that we want to invest in. We are just waiting for the prices to come to us."
Avery won't guess when that might be, except to say that it's unlikely for the remainder of this year. When it happens, though, the fund will return to its strategy of placing major bets on the nascent middle class in China, India, Brazil, and other emerging markets. Avery is also looking farther afield, to Vietnam and perhaps Egypt, or other countries in Africa and the Middle East. He is particularly intrigued with jatropha, a natural biofuel, but is just beginning to suss out investment prospects.
Avery figures there's money to be made at economic turning points. The movement of people from farms to cities, for example, necessitates a massive infrastructure build out. And then the emergence of a middle class increases the demand for products and services. "The U.S. is stuck in a consumption stage of growth, and if you or I don't buy stuff on credit, the economy doesn't work," Avery says. "We're interested in places that are changing from one stage of growth to the next."
Unlike many fund managers intent on staying within their stated style of investing, such as small-cap growth or large-cap value, Avery isn't afraid to overhaul the fund's portfolio dramatically. Until late 2002, Ivy had most of its assets in the U.S. and was invested heavily in bonds. But with economic growth dependent on indebted consumers continuing to spend, Avery couldn't figure out how the U.S. economy could expand by more than a few percentage points a year. So in 2003 the fund moved the bulk of its money overseas, starting with China, then adding India, Brazil, and other emerging economies.
Still, it's a bit of an oddity for a fund largely in cash to be attracting so much money. "I am surprised myself. I have stood up and said, 'Stay as defensive as you can, and if you've got to sell [my fund] to do that, do it,' " says Avery. "Then they send me more money."