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Subject: Making Money In The Mutual
Date: Fri, 20 Nov 92 13:33:51 EST
Message-ID: <7.1992Nov20.133351@AmeriCast.com>

11/20/92


TITLE Making Money In The Mutual Buying Power Is Measured By Cash
Position

Managers Will Raise Level When Few Stocks Fit Strategy Doug
Rogers Cash levels in stock funds represent potential new pur-
chases of equities.  Many stock funds are allowed to keep a sub-
stantial amount of assets in cash or equivalents, such as money
market instruments or short-term Treasury securities.  A fund's
cash level climbs when money flows into the fund and the port-
folio manager is unwilling to buy additional stocks. Heavy in-
flows often occur after a run-up in stock prices, when a fund's
current holdings exceed buy levels and the manager can find few
new attractive prospects.  In addition, most fund managers keep
some cash on hand to accommodate any real or expected redemp-
tions.

As of Sept. 30, stock mutual funds had $423.24 billion in total
assets. Of that, $39.43 billion, or 9.3%, in cash.  Philip Roth,
chief technical analyst at Dean Witter Reynolds Inc., says he
views a cash level of 12% or higher as bullish and a level of 9%
or lower as bearish. Those levels represent extremes rarely
reached in the past 15 years, he notes.

"It dropped under 8% early in 1992, and for all intents and pur-
poses that was a peak of some kind," he said. Funds' cash level
increased from January, reaching 9.9% in August. But it slipped
in September to 9.3%, and Roth suspects it will be lower again in
October.  "I interpret this to mean that as there was some build-
up in caution on the part of portfolio managers in the second and
third quarters, they built up a little buying power," Roth said.
"In September, they decided to start putting it back in." Roth
says the cash level gave a negative signal in early 1992, which
has improved but has yet to be reversed.  "I consider the cash
indicators to be in a neutral-to-bearish range," he said.  Roth
observed that the huge influx of money into equity funds this
year enabled cautious portfolio managers to raise cash levels
without having to sell positions. A record $58.01 billion in net
new cash flow was dumped into equity funds through September, ac-
cording to the Investment Company Institute.  If new money hadn't
been pouring into the equity funds and portfolio managers needed
to sell stocks in order to reach desired cash levels, Roth said,
"it obviously would have had a much different effect on the mark-
et." Interest rates play a role in cash levels. With banks paying
less than 3% on savings accounts, money has flowed into money
market funds en route to mutual funds. A significant rise in
rates could "cut off the cash flow into equity funds, which would
have an adverse effect on stocks," Roth said.  The supply of new
stock coming on the market in the form of initial public offer-
ings also plays a part in cash-level dynamics. For example, the
market might get along fine with small amounts of cash waiting on
the sidelines if the supply of new stocks were low.  But as IPOs
have picked up, the market has needed a relatively greater amount
of cash ready to swallow additional supply.  Some money managers
are more impressed by the absolute amount of dollars in funds'
liquid assets than the percentage of total assets represented by
cash.  Rod Linafelter, co-manager of Berger 100 Fund is one who
puts less emphasis on percentage. "It's meaningless. It's not
percentages that make the market go up, it's the absolute
amount."

He may have a point. The amount of money in liquid assets was
$39.48 billion on Sept. 30, when the percentage was 9.3%. That
compares with $29.15 billion waiting in cash in funds on Oct. 30,
1990, when the level was 12.9% of equity funds' total assets.
Ten years ago, the 9.2% of equity funds that was held in cash
represented $4.6 billion. Three months earlier, in June 1982, a
cash level of 12.2% meant $4.71 billion.

Roth also considers the absolute numbers, but insists the percen-
tages are more useful.  Investors also may find it helpful to
look at how cash positions are spread among different types of
equity funds. As of Sept. 30, aggressive growth funds led in cash
positions with 11.5%, or $7.82 billion, while growth-and-income
funds were running at 7.5% cash, or $11.54 billion. Growth funds
had 10.6% of assets in cash, or $13.8 billion.

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