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Mutual Fund Managers Move Into Cash as Prices Swing Wildly
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"Lots of people are arguing that stocks are cheap," said Philippe Gijsels, 37, senior equity strategist at Fortis Global Markets. The problem is that when estimates of earnings and asset values prove unreliable, "those measures break down."
Mutual fund managers who invest for pension accounts, insurance companies and individuals raised the cash they held to 4.9 percent of client assets this month, according to Merrill. The last time the level was higher was in March 2003, after the S&P 500 had lost almost half of its value from its 2000 peak.
In the last U.S. bear market between March 2000 and October 2002, when the S&P fell 49 percent, U.S. mutual funds lost 19 percent, including dividend payments, Bloomberg data show. That compares with a 5.6 percent gain for hedge funds, according to Bloomberg data.
Jeffrey Mortimer, chief investment officer of equities at Charles Schwab Investment Management in San Francisco, which oversees almost $40 billion, said investing in stocks now is worth the risk because prices are historically cheap. Companies in the S&P 500 trade at 14.03 times estimated profit, according to Bloomberg data. Index members last traded at a cheaper valuation based on historic earnings in October 1990.
"The price of admission for playing is that the market sometimes gets quite violent on the downside," said Mortimer, 44. "If you're a long-term investor, you should welcome this stuff."
Stefan Wintner, 25, who helps manage $4.6 billion at Kathrein in Vienna, disagrees.
"We'll wait for volatility to come down, prices to improve across the board," he said. "Prices look cheap, but if earnings fall 20 percent, then they don't look that cheap anymore."
Michael Tsang in New York, Sree Vidya Bhaktavatsalam in Boston and Demetrios Pasigos in Skillman, N.J., contributed to this report.
