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November 17, 2000

Fund Managers Raise Their Cash Reserves
By Aaron Lucchetti And Craig Karmin, The Wall Street Journal

Fund Managers Won't Rush Back In Where Investors Fear to Tread ... Weiss comments

NEW YORK - Mutual-fund managers are stuffing more money under the mattress.

Uneasy with volatile stocks, many fund skippers have been building up cash reserves to their highest level since the turmoil in financial markets in late 1998. Stock funds held an average 5.3% of their assets in cash at the end of the third quarter, up from 4% six months earlier, according to the latest numbers from the Investment Company Institute.

The rising cash pool could have significant implications for the stock market and fund investors. The greater caution being shown by fund managers is a big negative for stock prices, since stock mutual funds control more than $4 trillion in buying power. But the markets also stand to get a major boost as fund managers are likely to start emptying their wallets eventually and put some of that money back to work in stocks.

The uptick in cash holdings is far from small change. Based on U.S. stock-fund assets of about $4.4 trillion, a move to 5.3% in cash on Sept. 30 from 4% March 31 means about $57 billion more now is sitting on the sidelines in Treasury securities and other liquid investments instead of being invested in stocks. The Sept. 30 cash level is the highest since November 1998, when it stood at 5.5%.

Don't count on that cash accumulating on Wall Street's sidelines to pour back into the stock market anytime soon. The perma-bulls are salivating over the cash that fund managers are sitting on. They think that if those fund managers put more of that money to work, it will ignite buying interest in a market that has gone very cold.

It sounds like a wonderful plan -- except to smart fund managers. As the bear market awakens, common sense moves fund managers to park more and more cash in liquid investments such as Treasuries or other liquid securities. Already, there are some stock fund managers that have more than 70% of their assets in liquid investments.

But those are the lucky few. On average, stock fund managers have just 5.3% in liquid assets. As the economy slumps and company earnings and profits continue to suffer, many fund managers will throw in the towel and flee stocks like the exchange is falling down on their heads. We're going to see those cash positions double.

In other words, the bulls will be waiting around for a long time if they think that mutual fund managers will come to their rescue. The trend will be for funds to take more money out of the market -- not put more cash back in.

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