In a Wall Street Journal Moneybeat blog post, financial reporter Jason Zweig highlights the decline of cash holdings in funds. He observes that “between 1986 and 1995, stock funds held an average of 9% in cash,” but “as of this Jan. 31, the average U.S. stock fund had only 2.9% of its assets in ‘liquid assets.'” He suggests that “the job of deciding when to hoard cash” has shifted from managers to individual investors. He attributes this to “the ascendancy of index funds,” which “has made holding cash into something like a sin.” He says that “for active stock pickers, the math is cruel” because “the more cash stock pickers hold, the likelier they are to underperform in a bull market – and to turn off existing and future investors.” He cites the Pinnacle Value Fund, which currently holds 44% of its mere $60 million in assets as cash, noting that manager John Deysher observed that “the fund would probably be a lot bigger if we were fully invested,” and suggesting it would have performed better recently too. (The fund outperformed the Russell 2000 by an average of 0.3 percentage points annually over the last 10 years).

To explain why holding cash matters, Zweig explores “bigger truths about how markets are likely to behave in the next downturn” on the basis of the decline of cash holdings.  Specifically, he notes that “in the next severe decline, only those with cash will be able to buy.” Pinnacle manager Deysher, for example, explains that he is holding so much cash because the “small stocks [the fund invests in] have tripled since 2009, and we’re reluctant to chase them just because they’re going up.” Further, he adds that the biggest long-term returns will come from buying “when the market is down 30%, 40%, 50%.” He says the decision by an active manager to hold cash “takes that burden off [investors’] shoulders and puts it on mine.” Greg Estes of Intredpid Endurance Fund, which has two-thirds of its $250 million in assets as cash, seems to take the same approach. He commented: “You have to be okay with being called an idiot, potentially for a very long time” because “most people . . . think when they see the market going up that there’s no more risk and they should just go all-in,” and “they fear missing out.” According to Morningstar, only 1.6% of U.S. stock funds have at least one-quarter of assets in cash, compared with 4.1% in 2009. Zweig suggests that managers such as Deysher and Estes are, therefore, “rarer than white rhinos” – a point that may become particularly salient during the next steep market decline.