When Cash Is King

When it comes to the investing game, cash won't make you rich -- unless the market panics and everything heads south at the same time. That's when cash is truly king. And while I think we're in for quite a bit more volatility and many more downward dips, nobody's finger should be on the panic button.

However, investors who are closer to retirement or who just want to cut down on short-term losses may find cash to be a useful ally in the current environment. Fortunately, there are a number of first-rate actively managed funds that tend to make holding a large cash cushion an ongoing part of their investment process.

Focus on value
Investors who are willing to embrace concentrated stock selection might want to consider the Yacktman Focused Fund (YAFFX). Management looks primarily for high-quality companies with stable earnings and low levels of debt. This is a very high-conviction fund, with only about 50 holdings, and the top 10 holdings account for more than 60% of total fund assets. Such a strategy can only be executed by a management team that is spot-on in their stock picking. Fortunately, the folks in charge have measured up on all fronts, racking up an 8.2% annualized return over the past 15-year period and landing the fund ahead of 98% of its peers.

While the fund is a dedicated equity fund, it has always held a hefty cash position. Though the fund's cash holdings accounted for 13.7% of assets at last glance, according to Morningstar, that cash stake has been as high as 25% in prior years. That cash stake has helped blunt losses in bear-market years such as 2002 and 2008, when it beat the market by a double-digit margin.

Defensive consumer names are a huge part of the portfolio here, and include Procter & Gamble (NYSE: PG  ) and PepsiCo (NYSE: PEP  ) , which management likes because their business models offer predictable and consistent returns, making them especially valuable in today's uncertain environment. This is a great fund for investors who want to play a little defense without giving up return potential.

Half-and-half investing
Investors who want a more moderated approach to investing in the current market may want to consider hybrid funds, or funds that invest in a combination of stocks and bonds. These funds' lowered risk profiles make them ideal for gun-shy types who don't want to go full-out with equity exposure. If you're in this boat, take a look at T. Rowe Price Capital Appreciation (PRWCX). This balanced fund invests in a roughly 60%/40% stock/bond mix, with cash playing a large role on the fixed income side, most recently at about 19% of assets. Manager David Giroux has the flexibility to adjust his equity allocation, although it usually lands in the 50%-70% range, and supplements his corporate bond exposure with convertible bonds and leveraged loans, giving this fund a more distinct profile among its peers.

The equity portion of the portfolio tends to contain more moderately sized large-cap names, although some megacaps do work their way in. Google (Nasdaq: GOOG  ) is a significant holding, thanks to declining valuations that finally made the stock attractive to Giroux last year. He believes earnings growth should accelerate in the future as the firm's long-term capital expenditures place less downward pressure on profit margins.

Similarly, he likes Walt Disney (NYSE: DIS  ) because of the company's profit mix (less than one-quarter from the cyclical parks business, more than half through its more stable cable networks business) and its strong franchise value. This fund isn't without its short-term bumps, but its fixed income exposure and high cash stores make it an excellent holding for reluctant investors.

Keeping your options open
Another option for those folks who really want a cash boost within their fund holdings is FPA Crescent (FPACX). This fund employs a "go-anywhere" approach to investing, with manager Steve Romick free to invest across asset classes, market capitalizations, and geographic regions. Contrarian moves are par for the course in this portfolio, so don't be scared if the fund zigs when the market zags. Defensive consumer names play a big role here as well, with top holdings such as Wal-Mart (NYSE: WMT  ) , whose recent P/E ratio is near a decade-low.

Historically, cash has always been a large factor in the investing process at FPA Crescent, especially when Romick isn't finding current valuations attractive. While the fund's cash stake stood at 32% of assets as of the most recently available data, historically it has been much higher. Bonds aren't getting much love from Romick as a result of their low yields, so cash is used to reduce risk and limit downside movements in the portfolio. Even with its defensive nature, the fund has still earned an annualized 8.3% in the past decade and a half, out-earning 98% of all moderate allocation funds. Preventing losses is a priority at FPA Crescent, so nervous investors should find a lot to like here.

Cash may not always be king, but it can be a useful tool in today's highly uncertain market. So if you've been itching to safeguard some of your assets, consider a solid fund that makes holding cash a way of life.

Cash can be an important component in reaching your retirement goals, but you'll need more than piles of the green stuff to ensure your golden years are worry-free. Be sure to check out our newest special free report, which highlights the shocking truth about your retirement. Don't miss this chance to grab your free copy of this can't-miss report today!

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. The Fool owns shares of PepsiCo, Google, and Disney. Motley Fool newsletter services have recommended buying shares of PepsiCo, Procter & Gamble, Google, and Walt Disney, as well as creating a bull call spread position on Wal-Mart and a diagonal call position on PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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