A recent Bloomberg article titled S&P Rally Slowed by Fastest Cash Depletion Since 1991Â talked about how the amount of cash in equity mutual funds “dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991″.
That headline caught my eye, because I keep close tabs on that data, and while I was well aware that the percentage was declining, I was not aware that the actual amount of cash was declining at such a fast pace.  So I decided to do a little simple math.
I am going to start from the end of February 2009, when the liquid asset ratio (the percent of assets invested in cash and cash equivalents) was at 5.7%, the same as it was the month before in January 2009. At the end of February 2009, the total assets in stock funds equaled $3,104,921.3 million (a little over $3.1 trillion). Multiplying the assets by the percentage gives us the liquid assets total of $176,980.5 million (nearly $177 billion).
Fast forward to the end of January 2010. Cash now only comprises 3.6% of the assets. Total assets were $4,776,900 million (nearly $4.8 trillion). Multiplying the two, we find that cash is now $171,968.4 million (nearly $172 billion).
The difference in cash amounts … the gigantic pile of cash that these fund managers have allegedly “burned through”  … comes to a mere $5 billion!
Nearly everybody reading this now knows what happened. The cash pile didn’t shrink by a significant amount. What happened is that the other assets rose by a significant amount. The rising stock prices meant that the level of cash, which was relatively steady over the time frame, became a smaller and smaller percentage of the assets.
Here’s another way of looking at it. If stocks had not gone up, then the $5 billion decline in cash would have caused the cash-to-assets ratio to go from 5.70% to 5.53%. Is that news?
The punch line is that the percentage of cash did indeed fall at one of the swiftest rates in history. Well, think about what the market did the past year. It rose so fast that the stock portion of mutual funds rose at one of the fastest rates in history. Consequently, the news of the rapidly falling liquid asset ratio is nothing more than a function of the size of the market’s rally!
Just to be clear, I am NOT saying that this is bullish. The fact is that the last time the liquid asset ratio was down at this level, the market did indeed embark on the catastrophic bear market. I’m just pointing out that the reason the liquid asset ratio fell has less to do with mutual funds “burning through cash” and more to do with the market’s rally.
– Don
That BB article didn’t pass my sniff test on 1st reading either, I just went to the data and saw what a misleading line had been taken. Sadly this credibility hole in the mainstream press just gets bigger. Thanks for adding to the sanity.
Don, your math looks correct to me without going through the steps to verify it, but isn’t there another consideration to factor?
The factor I am thinking of is the fact that a much higher equity market valuation requires much more cash to support the much higher prices of the component stocks. It is like lifting and holding a weight overhead; the more it ways the more energy it takes. A 1200 SP500 takes more cash to support than a 666 SP500.
So, yes, in terms of actual cash lying around, it hasn’t changed all that much; but, in view of my argument, aren’t cash needs much higher?
Cheers! Brad Reid
ways should be “weighs” of course… sorry. Brad
Brad, that may be true. But that’s not what the Bloomberg article I responded to was about. That article was about mutual funds “burning through cash”. But they haven’t burned through cash. Their inflows during the time frame were negligible, and the cash they had on hand was also practically unchanged. So, unlike the article claimed, mutual funds did not burn through cash whatsoever.
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