Five low-cash funds that may be worth adding to a portfolio

Dollars & Sense

February 23, 2003|By Russel Kinnel | Russel Kinnel,MORNINGSTAR.COM

Nearly all investors should have some cash in their portfolios because you never know what's around the corner. Your house or car could require immediate repairs or you might lose your job, and that cash could come in handy. So, it's a good thing to have some money market funds or to own treasury bills directly.

Of less value, though, is cash in a stock mutual fund. If a fund is 85 percent stock and 15 percent cash, it's still way too volatile to be used as a rainy-day fund. Not only that, you're going to earn a lousy return on that cash. Treasury bills are currently yielding 1.17 percent. Subtract a typical stock fund expense ratio of 1 percent, and you're left with a pathetic 0.17 percent return, which is actually negative after you adjust for inflation.

If you have a fund or two in your portfolio that regularly hold cash, it's probably a good idea to make your next investment in a fund that stays fully invested - that is, it keeps cash to 5 percent or less. Here are some good examples of some different types of low-cash funds.

Vanguard Total Stock Market Index: An index fund is the logical launching point for a discussion of fully invested funds. Index funds hold very little cash because they are trying to match their benchmark's performance. In addition, managers usually can use very liquid futures to manage inflows and outflows, so there's less need to hold cash. I chose this one because it's as good an index fund as you can find. It has low costs and covers pretty much the entire U.S. stock market. I like it a bit more than the S&P 500 because it doesn't have problems with big stocks moving in and out of the index as their market capitalization changes.

TIAA-CREF Growth & Income: This fund is a small step from an index fund. TIAA-CREF doesn't believe in holding cash and limits the amount by which its funds can deviate from the index. The shop blends fundamental and quantitative strategies in which managers make stock bets, but quantitative managers tone down sector bets. Another similarity to index funds is this fund's low 0.43 percent expense ratio. Not quite as cheap as a Vanguard index fund, but it's not bad.

Turner Midcap Growth: Turner likewise doesn't hold cash and keeps its funds tethered to an index. However, this fund's performance won't remotely resemble that of the two funds above. Although Turner keeps sector weightings in line with the Russell Midcap Growth Index, this fund uses an aggressive momentum strategy that makes for dramatic performance shifts. When growth stocks were king in the late 1990s, this fund was a world-beater, and in the current bear market it has gotten shellacked. If you already have a strong core to your portfolio but are light on growth, this fund could make a nice addition.

Torray Fund: Now we're really getting away from index funds. This fund doesn't like to hold much cash, but that's where the similarity ends. Put simply, Torray is one of the better concentrated funds. Managers Robert Torray and Doug Eby like to buy good companies at distressed prices, and they do so with conviction. They typically hold less than 40 stocks in the portfolio. Once a stock makes it in, they tend to hold it for a long time. And talk about results. This fund's 10-year returns have beaten 97 percent of the large-value category.

Marsico Focus: Speaking of great focused funds, this is one of the best on the growth side. Manager Tom Marsico has generally kept risk under control by keeping an eye on sector weights and other risk factors. Meanwhile, he's delivered great results over many years by blending good stock picks with some top-down analysis of economic trends. Marsico will hold cash every once in a while, but not very often. We named him Morningstar Manager of the Year way back in 1989.

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