cash level of mutual funds

A search on the internet shows an interesting article:

As investors pull back, stock fund cash levels hit record low
Mutual Funds
August 14, 2011|By Mark Jewell, Associated Press

Stock mutual funds held an average 3.4 percent in cash as of June 30, the latest data available, according to the Investment Company Institute, an industry trade organization. That’s down from 3.7 percent a year earlier. But it’s the lowest percentage in ICI records dating to 1984.

With relatively little spare cash to put to work, stock fund managers “probably will not be the driving force behind any market rebound now,’’ says Matthew Lemieux, an analyst with fund tracker Lipper Inc.

Stock funds maintained their largest percentage of cash in 1990, when the average stood at more than 11 percent.

Based on the current low level of cash level in the average mutual funds, I suspect more downside in the economy is coming. Why do I say this? Based on historical records, most of the funds cannot beat the market average return (9%) over a 10 year period. It is likely that most mutual fund managers will be caught unaware when the market plummet. And just before the market recover sharply after a crisis, the fund managers will be caught by having too much cash level.

To prove this theory, look at year 1990, United States went through a savings and loan crisis and war in Iraq. Because of worries on the economy and countless redemption, fund managers keep more cash in the fund (see above report at 11%). In 1990, a bad year for market, this is exactly when an astute fund manager needs to buy more stocks, not hold higher cash level, but they could not do it due to many redemption and worries on the economy.