Michael,
You're right about the main reason for EG's underperformance over the past year. Small-cap growth stocks have not seen the kind of support that the larger names have received.
Your second point about the fund holding too much cash would make sense if there has been a bull market in high-multiple, small-cap growth stocks. But, the opposite has been true. In a volatile market as we've seen in the type of stocks that EG invest in, a 20% cash position would help LIFT (not weigh down) the portfolio.
As of yesterday, PBHG Emerging Growth was $1.381 billion in size and was holding 13.0% in cash. This compares with $1.511 billion and 12.2% on 12/31/96. The -8.6% decline in total net assets from the beginning of the year roughly correlates with the fund's -9.1% decline in net asset value per share. So, cash flow is clearly not the reason for Christine holding a higher than normal cash position.
I would like to suggest that the real reason that the fund held a high cash position as of its last semi-annual report isn't because there aren't enough good stocks to buy. It was due to one of the best reasons for owning the PBHG funds: their strict "sell" discipline. At the first hint of any deterioration in the original "buy" criteria of a stock, the manager will pull the trigger, saving the pain of riding out the inevitable string of disappointments that usually follow.
As for finding enough "good stocks" to buy, it is my understanding that Christine is not now, or ever has, had that problem.
You should also note that, since its inception, the Emerging Growth fund has always held an average of around 12% in cash.
Best regards,
William |
