Some of the most admired managers in the mutual fund business are ducking away from stocks.
It's an unusual move that reflects some squeamishness about soaring stock prices. They are storing as much as a third of their clients' money in cash. In effect, the sizable chunk of cash would act as a shock absorber against any downturn in the stock market.
But stock mutual fund managers say they aren't storing cash because of a dire outlook. They don't expect the stock market to plunge 58 percent, as it did in the financial crisis, or 49 percent, as it did when technology stocks crashed in 2000.
"We definitely are not expecting disaster," said Wallace Weitz, who has about 30 percent of his clients' money sitting in cash rather than the large and midsize stocks that his Weitz Value and Weitz Hickory funds typically buy.
Rather, with stocks up about 200 percent from the financial crisis lows of early 2009, Weitz and other managers who are storing cash simply say most stocks have become too pricey.
The fund managers storing cash are called "value managers," only buying stocks when they think they are getting a bargain based on the value of the business.
"Very few things seem cheap," Weitz said.
When stocks are pricey, they are vulnerable if investors have grandiose expectations that don't come true.
"If there's a little nervousness, if earnings are disappointing or the economy does not come back the way some expect, or there's a confrontation somewhere in the world" investors might get hit with losses, said Dennis Bryan, manager of FPA Capital.
Instead of holding on to stocks that might be vulnerable, he'd rather stockpile cash and wait for a downturn before buying more. He is a cautious fund manager, who often builds up relatively large cash positions when he thinks stocks have become overly expensive.
According to Morningstar analyst Kevin McDevitt, about 7 percent of the 600 stock funds Morningstar follows are holding more than 10 percent in cash.
That's unusual. Generally, fund managers hold less than 5 percent in cash because they assume they've been engaged by clients to buy stocks. And clients tend to get angry and bolt if a large cash position stifles gains in a rising market. For the sake of career preservation, some managers buy stocks whenever they are climbing. It's easier to blame a loss on a sudden downturn that hits most funds in unison than to be an outlier with a lackluster performance when others are making nice gains in a rising market.
Weitz acknowledges that clients will probably be disappointed in his returns if the stock market keeps climbing. But, he says, all the money flowing into the system from stimulus from the Federal Reserve has bloated a wide range of stock prices. He has his eye on stocks he will purchase if they fall 10 to 15 percent.
Although some analysts argue that "you don't get paid to hold cash, it doesn't seem like a big sacrifice to hold cash," given stock prices that reflect about 85 percent of the value of businesses, he said. "When you overpay, you shift the odds against you."
Despite the recent sell-off in small company stocks, Bryan figures on average they are trading at about twice their norm. He says the only opportunities he has found lately have been in energy stocks.
He thinks analysts are overly optimistic about the U.S. and European economies and that stocks won't be able to provide the sales or profit growth investors are expecting.
"We could see 2 percent or maybe 3 percent GDP growth, but the consumer is still challenged," he said. "As I travel around the country everyone is really concerned. They don't see their wages up and they will be challenged for the cost of fuel, the cost of food and the cost of health care. That squeezes their discretionary income."
Despite the concern about prices, fund managers are not selling all their stocks and individuals don't need to bail out completely either, said BMO Private Bank's chief investment officer, Jack Ablin.
But he said individuals should examine their investments now and make sure they aren't more exposed to the stock market than they intend to be. Given the stock market's 30 percent rise last year and another 4 percent this year, people might have more invested in the stock market now than they think.