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Cash still king for some

Large market gains since March have not tempted these managers

FUNDS REPORTER

With North American stock markets roaring back with a vengeance from their debacle in March, some fund managers have been boosting cash.

The S&P/TSX composite index, which has jumped 43 per cent from its low, yesterday closed at 10,793.67 points. And the S&P/500, up 49 per cent from its March low, ended yesterday at 1,007.10.

We asked three fund managers to talk about their war chest of cash and their outlook.

IA Clarington Sarbit

U.S. Equity Fund

(about 86 per cent in cash)

Larry Sarbit is keeping up with his reputation as the king of cash among fund managers.

But his 86-per-cent cash hoard in his $125-million (Canadian) fund got an extra boost when it merged with two others in June, and he received an extra $48-million from liquidated stocks.

Still, the value investor has been selling off some holdings since the market began rallying after the March lows.

"We have trimmed our investments because of valuations," said Mr. Sarbit, who runs a U.S. stock fund for IA Clarington Investments Inc.

"Our concern is that a lot of stocks have rallied to points where the prices are in a lot of cases not cheap, and we are just not finding a lot of great businesses at bargain prices."

With dividend yields around 2.4 per cent and the S&P 500 trading at more than 15 times earnings, "things appear to be fair to fully priced," he said.

Mr. Sarbit is also concerned about the U.S. consumer becoming less of a driver in the economy. "Cash for clunkers only goes so far," he said, referring to Congress's program whereby people can trade in older cars in return for cash toward the purchase of new ones.

A lot of the growth and earnings increases U.S. firms have reported come from cuts to expenditures, he said. "You have got to see top-line growth and we really haven't seen that ...

"It's one of the tougher times" to find bargain stocks, he said. "I've been in this situation before in the early part of this decade. In 2000, we weren't heavily invested, but we still did okay ... and protected peoples' assets."

AIC Canadian Focused Fund (29 per cent cash) and

AIC Dividend Income Fund

(25 per cent cash)

James Cole is biding his time in the hopes of getting better bargains with the whack of cash in his two Canadian stock funds.

"We can afford to be patient here," says Mr. Cole, manager at AIC Ltd. "It would not be unusual to have some kind of pullback in the seasonally weak fall period after these kinds of [recent] gains."

But he doesn't expect a repeat of the March lows. "I think the crisis is past," he said. "There has been too much repair that has gone on over the last five or six months ... Companies that were of the greatest concern have used this window of opportunity to raise big amounts of debt and equity capital."

Still, he doesn't expect the North American economy to bounce back strongly. "There is going to be a protracted period, particularly in the United States, of economic weakness if we are dealing with an overhang in government budgetary deficits," he said.

The $1.8-trillion (U.S.) deficit in the United States, for example, will ultimately have to be paid off through higher taxes, reduced government spending or inflation, he suggested.

Mr. Cole has taken profits in stocks like Nexen Inc., Thomson Reuters Corp. and "some financials." But he also took a "big position" in Shaw Communications Inc. because he saw an opportunity.

"Shaw is an extremely predictable business with utility-like aspects in cable, Internet and telephony," Mr. Cole said. "It has got a 4-per-cent dividend yield and is attractive on a price-to-earnings basis ... and is generating free cash flow despite a dividend."

The manager said he can take his time to go shopping. "I am not trying to market-time here, but I also don't think things are going to run away from me," he said.

Front Street Diversified

Income Fund

(about 33 per cent in cash)

Eric Dzuba runs a balanced fund that has about one-third of its assets in cash. It's a reflection of a strong defensive stance because of the spectacular market runup.

"I am mildly bearish," said Mr. Dzuba, a manager at Front Street Capital Inc. "I don't think that global growth is going to pick up enough to warrant stocks continuing this upward move in the near to mid term - say the next three to nine months."

The U.S. consumer, which used to drive 70 per cent of GDP growth, is starting to become a saver, he said.

"Historically, that number has been closer to 60 per cent. If we return to more historical rates, effectively, we are taking hundreds of billions out of the global economy ... It is going to weigh on global growth for a long time."

North American markets could be due for a correction or could flat-line for a long time as well, he suggested. "I don't think we'll see the March lows, but we can certainly retrace some of this recent move."

Mr. Dzuba said the fund's real cash position is closer to the 20-per-cent range. That's because his fund, which has regulatory approval to do limited short selling, is keeping about 8 per cent in cash stemming from proceeds from short sales until the shorts are covered.

He has been shorting Canadian and U.S. energy and financial stocks in his fund, but it's been mainly as a hedge to reduce volatility.

"I have been cautious all the way through this piece - rightly or wrongly all this year and since the meltdown," he said. "I believe the markets have moved too far too fast. We are paying average multiples now in an economy that I don't think will grow at the same clip as in the past."

© 2007 The Globe and Mail. All rights reserved.

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