Analysis: Some funds lift cash levels as U.S. stocks' reversal feared

Tue Nov 19, 2013 4:09pm EST
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By David Randall

NEW YORK (Reuters) - As recently as six months ago, Sandy Villere was pushing more of his $1.1 billion fund into U.S. stocks - a good call given the 26 percent gain in the S&P 500 so far this year. But as he looks ahead to 2014, he's starting to question whether it could be downhill from here.

His concerns about rich valuations have prompted him to raise the level of cash he holds in his portfolio to 15 percent of assets, the highest level allowed by the fund's prospectus.

"We're just not finding any new opportunities to put our money to work in stocks," said Villere, whose Villere Balanced Fund VILLX.O mixes stocks and bonds and is one of the best performing balanced funds over the past 10 years, according to fund tracker Morningstar.

Villere is not alone. With stock market indices hitting record highs after gains of nearly 165 percent since the bull market began in March, 2009, some fund managers are starting to question whether the party will fizzle out in 2014.

As a result, the level of cash in actively managed stock portfolios has crept up to 3.5 percent of assets, according to Lipper, a Thomson Reuters company. While low on an absolute level, that figure is the highest percentage of cash held by fund managers since the financial crisis in 2008.

Among portfolio managers' concerns: what will happen when Federal Reserve decides to cut back on its $85 billion a month bond-buying stimulus program that has provided the easy money that has helped to push the stock market higher? Will the bond market suffer another selloff, raising borrowing costs and making bond yields relatively more attractive for investors? And are earnings and revenue growth sustainable enough to support current share prices?

Those concerns were underlined by activist investor Carl Icahn on Monday when he told the Reuters Global Investment Outlook Summit that he could easily see "a big drop" in the stock market because valuations are high and earnings at many companies are artificially fueled by low borrowing costs.

UNUSUAL CAUTION   Continued...

Traders work on the floor of the New York Stock Exchange, November 19, 2013. REUTERS/Brendan McDermid