The Role Of Cash In Value Managers' Performance

July 7, 2015

by John Coumarianos

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Active managers are suffering. In recent years, actively managed funds have failed to beat appropriate indices at an even greater clip than their usually high failure rate. Even those considered the best value managers have struggled in a market that seems to move in only one direction – up.

Cautious value managers will invariably underperform a market that has gained 159% from the beginning of 2009 through 2014 (using the S&P 500 TR Index). But the magnitude of the market’s gain and the gap in performance between historically good value funds and the market warrants a deeper examination at a moment when it’s tempting to write off active management and even the most venerable value funds.

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While these well-known value funds have been poor performers lately, their long-term records remain excellent. Their cash positions have, in part, caused their recent underperformance, but cash has also fueled their longer-term outperformance.

Below is a table indicating the funds’ current cash level, five-year return, 15-year return and Morningstar category rank for 15 years. (All fund and index data from Morningstar)

Fund	Ticker	Current cash level	5-Yr Return	15-Yr Return	15-yr Standard deviation	Morningstar 15-yr category rank
FPA Crescent	FPACX	38%	11.04	10.99	10.6	1
Yacktman Focused	YAFFX	17%	13.29	12.75	15.06	1
Sequoia	SEQUX	13%	18.02	10.31	12.24	1
First Eagle Global	SGENX	18%	10.24	11.34	10.71	2
Tweedy Browne Value	TWEBX	13%	10.96	5.9	11.6	23
Tweedy Browne Gobal Value	TBGVX	23%	10.58	6.88	12.16	4
Franklin Mutual Global Discovery	TEDIX	8%	11.71	8.66	10.58	3

Average		19%	12.26	9.55	11.85

S&P 500 TR		17.59	4.41	15.05
MSCI ACWI		11.93	3.63	16.13

Data as of 6/30/2015

Short-term laggards

None of the funds, except for Sequoia with its 18.02% return, matched the S&P 500 Index’s 17.59% annualized return for the five-year period ending in June 2015. In fact, most have trailed significantly.

All the funds, including Sequoia, have averaged over 12% annualized return for the five-year period, representing 350 basis points of annualized underperformance relative to the S&P 500.

While the returns for Sequoia and Yacktman Focused exceeded the MSCI ACWI index for the five-year period, those are predominantly domestic funds, making the comparison less than optimal. The funds whose best fit index is the MSCI ACWI are First Eagle Global, Tweedy Browne Global Value and Mutual Discovery; all of those funds trailed the 11.93% annualized return of the world index, with 10.24% and 10.58%, and 11.71% annualized returns, respectively.

One might look at these funds with their cash positions and declare them utter failures for not having exceeded their indices over the past half-decade. Perhaps their managers, psychologically scarred by the financial crisis, never mustered the nerve to put more cash to work as the Federal Reserve kept interest rates firmly on the ground.

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