You don't have to be a wild-eyed bull to do well in the stock market nowadays.
Quite the contrary: To judge by the current list of top-performing stock mutual funds, a healthy measure of caution may help your cause.
That conclusion jumped off the screen as I glanced over a recent Bloomberg ranking of the top dozen U.S. growth and value funds for the past five years. The list featured such names as the $35.3 billion Fidelity Low-Priced Stock Fund, the $1.7 billion FPA Capital Fund and the $1.3 billion Fairholme Fund.
The managers of all three of these stalwarts look at stocks with a wary eye. "I expect the next five years will be a period in which the major market averages have difficulty generating a 5 percent compound annual total return," says Robert L. Rodriguez, manager of FPA Capital, which boasts an 18.9 percent annual return for the past five years.
The fund ended September with 35 percent of its assets in bonds and money-market securities rather than stocks. "Unless we are able to uncover new ideas, we are likely to see this level rising higher next year," Rodriguez wrote in the fund's recent semiannual report.
At Fidelity Low-Priced, which has gained 17.7 percent a year since late 2000, manager Joel Tillinghast's cash reserve was up to 12 percent at last report. "While I don't see particularly poor performance for small caps going forward, they probably won't continue to have the same expanding earnings multiples they've enjoyed for the past five years," Tillinghast told investors in the July 31 annual report.
"Meanwhile," he wrote, "profit growth will likely begin to flatten out. Against this potential backdrop, I'll be looking more and more to hold companies that can deliver earnings growth in a flattish sort of environment."
The Fairholme Fund, a 15.3 percent-per-year gainer over the past five years, had 24 percent of its assets in cash and bonds as of Aug. 31. The big cash position is the result of "continuing demand for the fund and our caution regarding new investments," manager Bruce Berkowitz said in a shareholder report.
Such comments contrast sharply with the kinds of noises some top-performing fund managers were making in the last bull market. You may remember, a New Economy was dawning with almost unlimited promise. "Cash is trash," the all-stocks-all-the-time crowd kept telling us.
With stars such as Rodriguez, Tillinghast and Berkowitz dominating the firmament now, it's tough to claim that anybody is being lured into stocks with promises of easy riches. Hard-nosed realism, if not skepticism, is generally a healthy and welcome thing in investing.
In fact, its prevalence among the current top-performers list may even provide some reassurance against a repeat of the kind of breakdown that hit the markets from 2000 to 2002. Cash reserves can serve as a good cushion against excessive optimism and complacency.
"In a volatile world, liquidity has been and should remain a competitive advantage," Berkowitz says.
The trouble is, the available data give no evidence that stock-fund managers as a group are following the lead of these top performers. According to Investment Company Institute figures, "liquid assets" of stock funds have dipped below 4 percent of assets for the first time in memory.
At the end of September, they stood at 3.8 percent, below their late-1990s low of 4.2 percent. Until the late 1990s, this ratio typically fluctuated in the 7 to 10 percent range.
So the wariness of top fund managers right now can't readily be used as a contrarian indicator to buttress the bullish argument for stocks. Instead, it looks as though those star money managers are themselves the contrarians.
That's a sobering point to ponder, especially for stock-market bulls such as the author of this column. By its very nature, the market usually does whatever it must to discredit the majority view.