Few people have ever accused money manager C.K. Lawson of being scared. He stares down crocodiles, hippos and other big game on wild safaris all over the world. And when it comes to investing, Lawson has bucked conventional wisdom for 40 years. Back in 1974, when few people wanted anything to do with stocks, he bought shares in coal companies, oil refineries and uranium miners, and he made investors a small fortune.
But for a bold, brave Texan, Lawson has been awfully hesitant lately. Ever since the crash, he says, he’s been adding more names to the list of stocks he’d like to buy for the $13 million Armstrong Associates fund he manages. Yet instead of buying them, Lawson has pushed 30 percent of the fund’s assets into cash, the most he’s held since the early 1970s. He says he’s not scared, just worried the market will tank again. “You don’t need to hit the home run, but you don’t want to strike out,” he says, noting that the strategy limited the pain of the crash last year. But in 2009 all the cash hoarding also turned Lawson’s shareholders into mere spectators to the fiercest stock rally in decades. In all, Armstrong Associates investors saw their fund rally barely half as much as the broader market. Those stocks he was interested in? One of them zoomed up almost 50 percent—without him.
The mutual fund industry is built on the idea that professional investors, unlike ordinary folks, won’t let fear get in the way of rationally investing in stocks. The pros, we’re told, will thoroughly analyze stocks and buy them with conviction, even when individual investors want to panic-sell and stash money in their mattress. But it turns out that in the wake of the greatest crash since the Great Depression, many fund managers have been acting like, well, the average investor, hoarding cash, running from risk and costing shareholders billions in missed opportunities. In what amounts to a race to the middle of the pack, many large-company stock funds are paring back investments to make their funds look safe compared with their competitors’ and their benchmark indexes. From modest-sized funds like Lawson’s to bigger players like the $2.5 billion Brandywine Blue, funds that traditionally put almost all their money in stocks have stayed on the sidelines, collectively sitting on billions of dollars in cash.
Of course, some of these managers would have looked like geniuses had the market kept falling. And some have recently stormed back into stocks. But by staying in cash for so long, many managers were, in effect, telling investors one thing—describing a market full of must-buy bargains—and doing something else. And the timing couldn’t have been worse: Just before the market rallied this spring, 41 percent of professional money managers admitted they were “overweight” in cash, according to the Bank of America Merrill Lynch Fund Manager Survey. That’s the second-highest level of playing it safe in the survey’s nine-year history. “They were talking the talk but not walking the walk,” says Michael Penn, the firm’s global emerging-market equity strategist.
For their part, fund managers say some of this was beyond their control—they needed extra cash on hand to pay off nervous investors who wanted their money back. And clearly, no fund manager wants to do worse than the market as a whole. But the price of skittishness can be heavy in the fund business, something investors may discover as they probe their most recent quarterly statements. At a time when they could have jump-started their recovery from last fall’s devastating losses, some enjoyed only a fraction of Wall Street’s windfall. Now they must wait for another rally. “You can’t risk missing the upside,” says Jeff Keil, a consultant for the mutual fund industry.
“That’s a worse fate than avoiding risk.”
To some degree, playing it safe has always been ingrained in the mind-sets of fund managers, who invest $4.0 trillion in stock fund assets. Funds have traditionally been measured against an index of stocks in their sectors, and to make sure they don’t trail that benchmark, many managers wind up owning the same stocks in nearly the same proportions. Although some funds attract investors with short-term returns that blow their competitors away, those same funds tend to lose far more when they have poor years. Many fund managers, particularly ones who oversee huge pools of money, don’t want to be seen as “eccentric,” says Jeremy Grantham, chief investment officer of asset management firm GMO and a longtime critic of the industry.
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Wow! I thought even the dumbest, most incompetent investor knows that you should BUY LOW!
Why Some Fund Managers Missed the Rally http://bit.ly/nYL6Q
Why Some Fund Managers Missed the Rally http://bit.ly/1UfsZP
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