Stock Funds Holding Lowest Cash Levels Since 1972

U.S. stock mutual funds had one of their biggest months ever for net cash inflows in April, but inflows have plummeted this month--while fund managers are holding less “cash” than at any time since 1972, new data show.

Boosted by retirement account contributions as investors rushed to beat the April 15 tax deadline, stock funds took in net new cash of $26.6 billion in April, the highest since $29.1 billion was invested in the funds in January 1997, the Investment Company Institute said Thursday.

But the percentage of stock fund assets held in cash--mainly highly liquid money-market investments--tumbled to 4.2% at the end of April, down from 4.5% in March and the lowest since December 1972.

Cash reserves represent money that fund managers can immediately put to work to buy stocks, or to meet redemptions should investors suddenly rush to sell fund shares.

While the absolute amount of cash in stock funds, at $117 billion, is substantial, analysts look at the cash percentage relative to total assets, now $2.8 trillion.

Don Phillips, head of fund tracker Morningstar Inc. in Chicago, noted that a drop in cash levels is a concern because “the more cash fund managers have, the more buying power there is on the sidelines that can drive stocks higher.”

Cash levels have been declining since January 1996, when stock funds had 8.1% of assets in cash. The average cash position was 5.5% as recently as Jan. 31.

Stock fund managers are choosing to hold less cash in reserve partly because financial advisors are putting more pressure on funds than ever before to be fully invested, Phillips noted.

“A decade ago, stock fund managers raised cash when they thought the market was too high,” Phillips said. “That rarely happens these days.”

Managers who have maintained high cash levels have suffered in recent years, as their performance has dragged far behind funds that have chosen to be fully invested.

Still, low cash levels are a red flag for managers who recall what happened the last time funds were so fully invested, in late 1972.

The blue chip Standard & Poor’s 500 index lost almost half its value between January 1973 and October 1974, in the worst bear market of the post-War era.

Of course, that decline was caused by many factors, including the oil-price shock of that period. Nonethless, funds that were fully invested then had to dump stocks to meet shareholder redemptions, worsening the decline.

Some analysts say the market environment today is much different than in the mid-1970s and early-1980s and that the low cash holdings aren’t a big concern. Today, inflation and government spending are under control and interest rates are declining, so it’s little wonder cash levels are low, said Robert Froehlich, strategist at Scudder Kemper funds in Chicago.

“In this environment, it makes sense to have as much money as you can in the stock market,” Froehlich said. “You get penalized when you’re holding cash.”

But a sharp drop in new stock fund purchases this month, coupled with April’s low cash levels, could be a big reason why the stock market has struggled.

Fidelity Investments, Vanguard Group, Charles Schwab, T. Rowe Price Associates and Scudder Kemper all said investors have slowed their new purchases of equity funds in May.

Fidelity, the nation’s largest fund company, said stock fund inflows have fallen to about $500 million in May from almost $2.5 billion in April. Vanguard, the second-biggest fund company, reported that its stock funds attracted a net $2.7 billion, down from a record $4.2 billion in April.

Investments in funds usually slow after April because the bulk of 401(k) retirement plans are established in the first quarter.

“It’s been a pretty dramatic slowdown, though, because the stock market has had some choppy times and investors are nervous,” said Carl Wittnebert, Trim Tabs’ research director.

Fund flow chart, D7

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* MARKET BOUNCES BACK: U.S. stocks close broadly but modestly higher after recent slide. D4