Market-Beating Funds: Why We’re at 25% Cash

Large stakes in DirecTV (DTV) and Berkshire Hathaway (BRK.B) have contributed to double-digit gains in 2013 for the $1 billion Weitz Value fund and the $846 million Weitz Partners Value fund.

More impressive are the funds’ index-beating gains over decades fueled by a focus on companies that are deemed to be trading at deep discounts to their business value. And when those deep discounts are hard to come by the Weitz team is content with letting the funds’ cash stakes rise. As in right now. Both funds have about 25% of their money parked in cash; most actively managed stock funds have cash positions below 5%.

As the team explained in its first-quarter note to shareholders, it’s not out to market time, but rather, “to improve our odds by investing more aggressively when the valuations are favorable and to hold onto cash reserves when the opportunity set is less attractive. We believe that cash has “option” value—being able to respond quickly to buying opportunities has contributed to our results over the years. Today, we are optimistic about the long-term prospects for our companies but we have plenty of liquidity available if Europe, or some other “surprise,” sets off a market decline that we can take advantage of.”

You don’t have to swing all the way over to gold-bug doom and gloom to see the merits in taking even just a small piece of your portfolio off the table right now.

^SPX Chart

^SPX data by YCharts

Hewlett-Packard (HPQ) was one significant trim for Weitz Value in the first quarter. The fund halved its stake after the stock’s recent sharp rally from the depths, as seen in a stock chart.

HPQ Chart

HPQ data by YCharts

Trimming also keeps big winners from overwhelming a portfolio. The 31% gain for Berkshire Hathaway over the past 12 months is more than double the gain for the S&P 500 index. In the first quarter the Weitz Value team trimmed its Berkshire Hathaway shares by 11%. That’s not a bet against Berkshire Hathaway; the stock is still the second largest holding in Weitz value, at more than 5% of assets. Just some risk-conscious portfolio management. And to the extent that trim went directly into Weitz Value’s cash coffers it lets the Omaha neighbor of Berkshire Hathaway stand ready to get greedy when a market “surprise” sets off most investors’ fear meters.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

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