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Fund Spy: Morningstar Medalist Edition

These Equity Fund Medalists Have Raised Their Cash Stakes

Are they battening down the hatches?

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It's six years into a bull market--from stocks' trough on March 9, 2009, through March 9, 2015, the S&P 500 rose a cumulative 246%--and some of our favorite funds sport higher cash stakes than usual. Fund managers as a group have not historically called market tops well, and most are focused on individual companies' fundamentals, so rising cash may not be a good indicator of a broadly overvalued market. But the funds below are steered by managers with strong track records and prudent approaches to valuation, so they could hold appeal for risk-conscious investors. Each fund is a Morningstar Medalist in one of the diversified-equity Morningstar Categories, is open to new investors, and recently held a double-digit stake in cash that was also above the norm for the fund during the past several years. Two funds that are closed to most new investors otherwise possess similar characteristics:  IVA International (IVIOX) and  T. Rowe Price Mid-Cap Value (TRMCX).

 American Funds EuroPacific Growth (AEPGX)
Morningstar Analyst Rating: Gold
Cash stake: 13.1%

This gigantic foreign large-growth fund typically holds about 5% to 10% of its assets in cash. That stake has reached double digits a few times in the past when valuations appeared stretched to the fund's managers, but that hadn't been the case in recent years until the end of 2014 when it hit 13.1%--the fund's highest cash weighting since at least mid-2008 (right before the market cratered). The fund's cash hoard during that span bottomed in late 2009 at 4.7%.

The fund has typically held up better than the category norm and its MSCI ACWI ex USA benchmark when stocks decline. For example, it bested the index by 5 percentage points in 2008's painful downturn (although the fund still lost 40.5% that year.).

 American Funds International Growth and Income (IGAAX)
Analyst Rating: Gold
Cash stake: 11.3%

Another somewhat cautious foreign fund from American, this one's focus on dividend payers has played a big part in its relative resiliency in down markets thus far. The fund was launched in October 2008, so it missed a substantial chunk of that bear market, but it held up better than 95% of its peers in 2011's decline. The managers were slow to deploy the fund's cash into stocks after its launch; it held 30% of its assets in cash at the end of 2008. It continued to hold a double-digit cash stake until the end of 2009, but cash then stayed in single-digit territory until late 2014. (Its lowest weighting was 3.2%.)

As with American Funds EuroPacific Growth, the managers run portions of the fund in separate sleeves, so the elevated cash stake is the outcome of each one's distinct investment process. Foreign equities haven't performed as well as U.S. stocks in this bull market, so the fund's cash stake is particularly notable; its typical peer holds just 1.2% of its assets in cash. But the managers may view their universe as pricey, as investors have chased yield.

 Diamond Hill Small Cap (DHSCX)
Analyst Rating: Gold
Cash stake: 21.1%

This small-value fund normally holds a substantial cash hoard, anyway--it hasn't dropped below 10% since mid-2008. That's because lead manager Tom Schindler is quite willing to let cash build when he finds small caps' valuations unappealing. But the fund's 21.1% cash stake at the end of February 2015 was its highest in nearly five years; it has risen despite small caps' weak performance in 2014.

Schindler, who has managed the fund since its 2000 inception, has demonstrated good timing in the past: The fund stashed 20.8% of its assets in cash in June 2008, right before stocks dropped sharply. As a result, it held up better than 90% of its peers that year. The fund's risk-adjusted performance has been strong during his tenure.

 Fidelity Low-Priced Stock (FLPSX)
Analyst Rating: Silver
Cash stake: 11.5%

This enormous all-cap value fund has long invested in hundreds of stocks (909 at last count), yet it has consistently managed to stand out from the crowd during lead manager Joel Tillinghast's 25-year tenure--as evidenced by its fine risk-adjusted returns over longer periods and its relative buoyancy in 2008 and 2011. But even with a sprawling portfolio, Tillinghast and his comanagers have had difficulty finding enough cheap stocks to put all of the fund's cash to work lately. The fund's cash stake has been in double digits since mid-2013. It also rose that high in mid-2011 prior to the market's third-quarter plunge and in 2008 as stocks began falling fast. Conversely, the fund's cash hoard hit its low point in late 2011 and early 2012 as Tillinghast and company scooped up bargains following the third-quarter decline.

 Tweedy, Browne Global Value (TBGVX)
Analyst Rating: Silver
Cash stake: 19.3%

The team of bargain-hunters at this foreign large-value fund often keeps dry powder on hand in case buying opportunities present themselves. That's one reason the fund earns a Low Morningstar Risk rating over all trailing periods and scored top-decile showings in the turbulence of 2008 and 2011. But the managers have been particularly cautious of late, as the fund's cash stake has stayed above 15% of assets since early 2013, while the category norm was recently just 2.8%. They're not always this skittish about valuations; the fund held no cash in early 2009 as the stock market hit its trough.

For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.