Holding cash in a bear market won't always lead to applause


ART BONNEL doesn't know precisely what is in his mid-cap growth fund right now. He knows exactly what is not in it. Stocks.

In a move that has been the undoing of a number of managers in the past, Bonnel moved his Bonnel Growth Fund entirely into cash on Jan. 24. Because Bonnel leaves the cash management to a partner, he's not entirely sure of the money market-type investments in the fund now. Instead he's focused on the market, anxious to get back in.

The move to cash is interesting because investors can view it in different ways. Only time will tell which view is right, but both sides merit consideration.

Bonnel says he is protecting investors, minimizing losses he foresees in the stock market. He's calling for the Dow Jones industrial average to bottom out at 5,000, with the Nasdaq composite hitting the floor at 750.

That's a drop of roughly 33 percent on the Dow and 50 percent on the Nasdaq.

The critical view of his move, however, is that Bonnel gets paid to invest in mid-cap stocks, and is now giving his shareholders what amounts to a very expensive money-market fund that is positioned to miss some or all of any market rebound.

"I consider myself a damned good mutual fund manager, but a poor stock picker," Bonnel explains. "In a good market, I'm going to get 60 percent of my picks right. In a bear market, when 90 percent of stocks are going down, I'll be right less often.

"Why should I try to find stocks that will be up a lot three years from now when I have to ride a 30 to 50 percent decline before they turn around?"

It's a question a lot of investors are asking, given current market conditions. But few mainstream fund managers - excluding those running bear-market funds - have allowed themselves to ponder dumping everything, thanks largely to past history. Former Fidelity Magellan manager Jeff Vinik, for example, was vilified when he moved the giant fund into bonds while the bull market was still rolling. Likewise, Brandywine manager Foster Freiss saw money flood out of his fund after an ill-timed decision to go entirely to cash.

In those instances, investors didn't see the manager as "protecting" them; they saw the manager as "missing out" or "just plain wrong."

Bonnel gets a bit of a pass on that emotion because his move comes during a downturn. That makes "protection" a bit more palatable. He also benefits from having a smaller fund (roughly $110 million) in which his name is on the marquee, and where he has few institutional investors clamoring for him to stop messing up their asset allocation. The manager of a larger fund in a big family might be under too much pressure to make such a daring move.

"Stock fund managers aren't paid to sit on cash," says Leonard Goodall of the No-Load Portfolios newsletter, "but they're not getting paid to lose money, either. If he had done this in March of 2000, near the market's high, he would have been a genius but all of his shareholders would have jumped the ship. Three years of losses later, and you have to admit this will look conservative and smart to a lot of people."

But some investors may wonder what took Bonnel so long and use his past inactivity to question his current timing decisions.

Bonnel actually approached his board of directors about asking shareholders for permission to sell short - a way to make money when stocks decline in value - back in 2001. The board tabled his request. But if Bonnel was so negative back then, it's fair to wonder why he didn't go all-cash and spare investors the losses they have suffered since. Moving to cash required no board or shareholder approval.

In fact, Bonnel cashed out last September, but changed his mind during October's rally, only to go back to cash in January because "it wasn't the bull market I was looking for." While investors paid the costs for all of those trades, they also benefited from being out of the market, as Bonnel's fund was among the top performers in its peer group while he made those adjustments.

Bonnel is prepared to stay in cash indefinitely and expects to miss out on the precise market bottom, which may upset investors hoping for growth.

"But if the market drops 20 percent and I miss the first 10 percent of the rebound, I'm still ahead of the game," he says. "I will be able to be back in the market in a matter of minutes when I see the right conditions, and I can't wait to be there. I'd love to be wrong about where I think the market is headed, but I can't invest against the way I feel about the market right now."

Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, Mass. 02025-0070.

Copyright © 2020, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad