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Should stock-fund managers shift to cash?

Those who did suffered smaller losses last year. Yet few welcome that strategy.

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If you own a stock mutual fund, how much of the fund's money should be in cash?

As little as possible is the traditional answer. But that was before the great stock market crash of 2008.

Consider First Eagle Overseas fund. It lost only 21 percent last year, making it one of the Top 10 international funds while holding more than 10 percent in cash, wrote senior Morningstar analyst Gregg Wolper in a recent article. Another top performer: Third Avenue International Value, which had about 15 percent of its assets in cash in mid-2008. On the domestic front, Tweedy, Browne Value and the Yachtman Fund also had more cash than average and they, too, were among the leaders in 2008.

These results have at least some investors rethinking what they want from their fund managers. In his admittedly unscientific survey of readers, Mr. Wolper found that most people wanted to give managers more leeway to "go to cash," he says.

When stock prices were steadily rising, it would have been hard to find investors who didn't want their mutual funds to be "fully invested." In other words, these funds were expected to have almost no cash, perhaps 2 or 3 percent of assets, in their portfolios.

Stock funds, in particular, were expected to have at least 95 percent of their money in stocks. After all, if you were putting money in one of these funds, you wanted the manager to buy stocks, not sit on the sidelines with a bunch of cash. "When somebody buys a fund, that's what they expect," says Brian Lewbart, spokesman for T. Rowe Price in Baltimore.

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