Tracking Down Cash-Stashing Funds
Avoid funds that build heavy cash stakes on your dime.
Morningstar's fund analysts seem to be talking more and more about asset bloat these days. That's the phenomenon that occurs when funds get so big that the portfolio manager can't put all the money to work using the fund's preferred investment style. Morningstar analysts keep an eye out for bloated funds, and we often call on large funds to close to new investment to prevent degraded performance or style shift. For more on the subject, read "Why Great Funds Need to Close".
When Morningstar analysts look for asset bloat, the first two things we look for are style shift and a growing roster of holdings. Next on the list would be rising levels of cash in the portfolio. Often, managers have a tough time putting a fund's entire asset base to work, so they let cash pile up. Usually this happens for two reasons, sometimes simultaneously: Assets are flowing in quickly and heavily, or management can't find enough of the right types of stocks to buy. Letting cash build up isn't a problem per se, but in extreme cases, a problem we call "cash stashing" occurs. That's when already-large funds remain open, building a big pile of cash. Given that investors pay an expense ratio that covers all assets--not just the invested portion of a fund--cash stashing serves investors poorly in our view.
It's a bit difficult to find a whole roster of funds that suffer from general asset bloat, but it's relatively easy to locate cash stashing. Judging whether a fund has a bloated asset base demands lots of historical information. You can't look simply at current asset size to judge whether a fund has gotten too big. You've got to examine how a fund has grown and shifted over time. In other words, you have to look at each fund individually. But cash stashing is a bit easier to spot. You look for big, open funds with large cash stakes. For this edition of Five-Star Investor, we'll be concentrating on funds whose high fees exacerbate the problem.
There are multiple ways that you can look for the combination of a large asset base and significant cash. To be really precise, you might look at a specific category and only look for funds that have an asset base twice the average size and an above-average cash stake coupled with above-average expenses. Today we're going to hunt for the only worst cash stashers in the domestic-stock universe using the Morningstar Premium Fund Screener.
In the first two lines of our search, we'll narrow the field to domestic-stock funds that have above-average asset bases. Next, we'll weed out closed funds because they've already made some attempt to limit inflows. Then we'll seek out funds that have above-average cash stakes compared with their category peers (note that you could also easily set a numeric limit here--10% cash or 15% cash, for instance). Finally, we'll screen for expensive funds. We'll only look for no-load or front-load funds, and set the bar high at a 1.5% expense ratio.
To run this screen for yourself, click here. As of Aug. 6, 2004, the screen yields 27 funds.
No screen is perfect, of course, so not all of these funds are bad citizens. For instance, it would be harsh to suggest that Columbia Mid Cap Growth (CBSAX), which has a 3.5% cash stake and contains less than a billion dollars, is ripping off investors. So we'll highlight four offenders in particular.
Aegis Value (AVALX)
True, this fund has only $682 million in assets, but it also has a ridiculously high 51% cash stake. That's $351 million sitting on the sidelines. More than two thirds of the funds in the small-value category have entire portfolios smaller than this fund's cash stake. If you subscribe to the idea that it's not worth paying a portfolio manager anything to sit on your cash (since you could do that yourself for free), investors in this half-cash portfolio are paying management double the published expense ratio for the assets that are invested in stocks. By this logic, the expense ratio at Aegis Value amounts to a stratospheric 3%. Manager Scott Barbee says that he's had trouble finding stocks that meet his price-conscious standards. We think mutual fund investors should share that thrifty attitude and go elsewhere rather than help Barbee stash cash.
Eaton Vance Worldwide Health Science (ETHSX)
Investors have grown accustomed to paying more for specialty funds. That's because such funds tend to have smaller asset bases. That's clearly not the case here, though, as the fund has grown to $2.5 billion. Yet Eaton Vance continues to charge a shamefully high 1.99% for this fund's A shares, which is quite a price tag for active management. That's especially true given that the managers haven't been able to actively put all those assets to work. More than 11% of assets are idle, a cash stash of about $275 million.
ProFunds Rising Rates Opportunity (RRPIX)
Rydex Tempest 500 (RYTPX)
Rydex Ursa (RYUAX)
Rydex Venture 100 (RYVNX)
These funds merit both a disclaimer and an admonishment. All of them are bear-market funds, which means that they bet against an index or a bogy by short selling. Due to the nature of that process, they appear to be 100% cash, but they're not truly sitting on the sidelines. They are, on the other hand, gouging investors. Basically, these are index funds in reverse, yet their costs are exorbitant: ProFunds Rising Rates charges 1.57%, Rydex Tempest 500 charges 1.71%, Rydex Ursa charges 1.87%, and Rydex Venture charges 1.71%. It certainly doesn't cost Rydex and ProFunds that much to run these offerings; the funds should pass on some savings to the market-timers and speculators who use them.
Todd Trubey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.