A recent Bloomberg article titled S&P Rally Slowed by Fastest Cash Depletion Since 1991¬†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.