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Mutual Funds Are Asset-Rich and Cash-Poor


Would you want a 0.01% cash yield?

My Dad admires a man he used to work for, always saying, "I wish I was that rich."

And he is rich, holding somewhere around $2 million in Wisconsin timberland. But he's always short on cash, and has to borrow to meet some basic monthly expenses. That's usually fine, but if things turn south, then he may not be able to borrow, or sell some land to generate cash, and could run into a heap of trouble. He's asset-rich, but cash-poor.

Mutual fund managers seem to be in the same boat.

The chart below shows the total amount of liquid assets (i.e. cash) held by US equity mutual funds. As of December, it dropped to 3.6% of total assets. That's the second-lowest amount in history, next to June and July of 2007.

This has been a decent contrary sentiment indicator, as extremely low levels of cash tend to lead to subpar performance in stocks in the months ahead, and vice-versa. Certainly there are good reasons to hold little cash right now (exceptionally low yields, strict fund charters against market timing, etc.). So maybe this isn't as effective an indicator as it used to be.

But personally, I'd sure like to see a larger cash cushion, just so I felt more comfortable that in the next leg lower in equities, we won't have a rush of mutual-fund managers selling stocks to meet redemptions instead of being able to pay them out of their cash hoard.
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No positions in stocks mentioned.

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