May 19, 1999
Dow Jones Newswires
Fund Investors Hoard Cash For Y2K Defense, Opportunity
By MARA DER HOVANESIAN
NEW YORK -- Mutual fund investors have found a new hot prospect: cash.
At their financial advisers' urging, fund investors are loading up on cash
reserves - by selling equity funds and holding back on new investments. Why?
Because some think year 2000-computer glitches will provide windfall gains
in cheap stocks and they want to have money on hand to buy more.
Other investors fear they'll be wiped out.
"It's not a non-event or a hoax," said Edward Yardini, Deutsche Bank's New
York-based chief economist - and a vocal Y2K fatalist. "Investors are taking
one heck of an optimistic assumption if they stay fully and aggressively
invested. Now is the time to lighten up."
Whether cash-hoarding investors are on the offensive or defensive, a surge
in money-market fund flows and a 50% drop in new money U.S. stock funds
suggests investors are not just spurning a "grossly overvalued" market,
Yardini said.
The Investment Company Institute reports that total money-market mutual fund
assets rose 25.9% to $1.44 trillion at the end of the first quarter this
year, up from last year's $1.14 trillion.
More, new net flows of $30.6 billion into U.S. stock mutual funds for the
first quarter was half the $60.6 billion the industry took in first quarter
1998.
What happens as the economy crosses the Y2K threshold is anybody's guess.
Yardini forecasts a 30% correction in the market, followed by a six-month to
one-year recession lasting through next year. Plenty of buy-and-hold
advisers and fund managers, on the other hand, say the event will pass
without much ado.
Either way, Robert Courser, a financial planner in Grand Rapids, Mich.,
doesn't want to take any chances.
'I don't think the world is as rosy as these fund managers say," said
Courser, who recommends that some near-retirees cash out entirely from stock
funds. "I think it's going to be bumpy."
Courser started swapping his clients' equity funds for fixed-income funds in
December, mainly for those one to three years from retirement. "They don't
feel confident," he said. "They can't afford to take a 20% hit."
He won't say which funds were getting the boot, but said he has mostly
recommended that some near-retirees move to a 50/50 mix of short-term bond
funds and money-market funds. It has meant trimming portfolios that held as
much as 60% in stock funds.
Courser said investors might even consider opting out of the Janus Twenty
Fund, the second-best performing large-cap growth fund in 1998. The fund
gained 73.4% last year, according to Chicago fund-tracker Morningstar Inc.
"I'm not sure I could look someone in the eye and tell them to dump
(everything) and bury it in the backyard," Courser said. "But maybe the
issue is not to move in new money, but to put it into cash. What's the worst
possible outcome? You miss a few points of growth in the market?"
A handful of Gail Parker's clients have asked her to liquidate up to 50% of
their stock fund positions. She has moved clients from the tech-laden
American Century Ultra Fund, the nation's seventh-largest stock fund, to
fixed-income funds, such as Eaton Vance Advisers Senior Floating-Rate Fund.
For a few, even a bond fund doesn't provide the shelter they seek.
"Some people don't want to be in anything until January," said Parker, a
certified planner in Portland, Ore. "It's not a panic - we've made a lot of
money lately. If there's a big downdraft, we can start buying again."
It's not market-timing, she said, but rather a "take-a-breather period for a
portion of the portfolios."
Getting Ready For Shopping Spree
Dallas financial planner Emerson Bell isn't willing to give up any
performance and swap equity funds for cash. Some clients, however, have
accumulated $5,000 to $10,000 in the last few months "just in case." It's
money earmarked for a spending spree.
"I'm advising my clients to hold their invested positions," Bell said. "I'm
recommending that they accumulate money - dry powder - to take advantage of
... opportunities that may be created by other people's fear and paranoia."
Like Deutsche Bank's Yardini, some are bracing for the worst - but not
because the world's computers will fail and bring global commerce to its
knees. Rather, they think that panic will force the hand of otherwise
rational investors to cash out. That's where one investor's loss may be a
successful market timer's gain.
"Fear can create losses like we've never seen," said Paul Merriman, a timer
who runs the Merriman mutual-funds group in Seattle. "That is why advisers
... are selling to the path of least resistance and telling clients that
they could sit this one out."
Merriman is monitoring potential Y2K impact on a daily basis and said the
decline due to Y2K may start in June or July, or it may have already
started. The market "hasn't changed sufficiently, yet it will," he said.
Buy-and-hold advocates may be the most frustrated with those clients
concerned about Y2K. Moving to cash is not what they'd recommend, but they
say they have to respect the wishes of a nervous clientele. Either fleeing
or staying put puts planners in a tough spot, said Joel Ticknor, based near
Washington, D.C.
"If Y2K is not a market disaster, you have caused clients to incur capital
gains taxes and lost opportunity," Ticknor said. And if Y2K does produce a
significant market downturn, there's no way to know when it's the right
opportunity to jump back in, he said.
John Hixson in Lake Charles, La., has gone as far as asking clients to put
their requests in writing before he moves them into a more conservative
asset allocation for Y2K. That's because the firm doesn't want to take the
blame if the client misses out on further market gains.
"If the client wants to take responsibility and override our strategy to get
through that period, we would consider reducing equities by 40%," said Eric
Flett, a planner in Walnut Creek, Calif. Flett said his company is shuffling
portfolios from now until July 1 for those "queasy about Y2K."
That more investors are growing antsy about Y2K is certain, say executives
of U.S. Bancorp Piper Jaffray Inc. In a January in-house study, the
Minneapolis investment banking house concluded that many Americans, or about
40%, are worried about Y2K, but only 13% were doing much about it.
That complacency has changed, said Terry Sandven, director of the firm's
portfolio strategy group. "It's not likely we'll have airplanes fall out of
the sky," he said. "(But) even fund managers will raise cash in anticipation
of investor withdrawals and weakness in the market."
Sandven said Piper Jaffray advisers are recommending that clients stick to
"quality" blue-chip stock funds, lighten up on international funds and move
into bond funds as a Y2K safeguard.
Morningstar Inc.'s head of stock-fund research, Russel Kinnel, however,
disagrees that fund managers are reacting to Y2K and potential investor
redemptions.
"If they're trying to time it, that seems more to do with fear than with
investment reasons, (and) I'm not sure that's a wise idea," Kinnel said. "I
think there are a lot more threatening things than Y2K, a lot less pleasant
things that could happen in the world."
-By Mara Der Hovanesian; 201-938-2129;
mara.derhovanesian@dowjones.com
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