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As Markets Rise, Cautious Mutual Funds Sell Stocks

NEW YORK (TheStreet) -- With the market soaring, signs have appeared that stocks could be getting rich. Some top mutual funds are trimming stocks and building cash reserves. Other funds are no longer accepting deposits from new investors, an indication that managers cant find bargains to buy.

Notable funds that recently closed themselves to new deposits include Vanguard Capital Opportunity (VHCOX) and Sequoia (SEQUX). Of the 222 small growth funds tracked by Morningstar, 30 are now closed.

The number of closings is likely to increase soon. After years of withdrawing assets from equity funds, investors have gained confidence in recent months and begun pouring cash into stocks. Most of the inflows have gone to star managers, but the cash is beginning to flow to second-tier funds as well.

Among the most noteworthy portfolios with a big cash stake is Yacktman (YACKX). During the past 10 years, the fund returned 10% annually, outdoing 99% of large blend peers. Portfolio manager Donald Yacktman is a die-hard value investor who holds cash when he cant find bargains. When stocks have been beaten down, he spends cash and favors lower-quality names that stand to surge the most when conditions improve. At the later stages of rallies, he builds cash and shifts to high-quality choices that can withstand downturns.

In the rally of 2006, Yacktman had 26% of assets in cash. That enabled the fund to outdo 98% of peers in the downturn of 2008. Then late in 2008, he put all the cash to work, buying lower-quality names that rocketed in 2009 and helped the fund outdo 99% of peers for the year. Since the financial crisis, the cash stake has climbed back up to 21%. Convinced that low-quality names present too much risk, he is focusing on the very highest-quality stocks, such as Procter & Gamble (PG) and Coca-Cola (KO). Yacktman recently announced that he is closing the fund to new investors on Dec. 31.

Other strong funds with unusual cash stakes include Weitz Partners Value (WPVLX) and James Balanced: Golden Rainbow (GLRBX). Both funds have experienced inflows, but they remain open.

Weitz Partners seeks undervalued stocks with solid cash flows. During the past five years, the fund returned 21% annually, outdoing 95% of large blend peers. In the depths of 2008, the portfolio had less than 5% in cash. But since then the figure has climbed to 28%. "We are not bearish particularly, but we are decidedly uninterested in most stocks at todays prices," says portfolio manager Wally Weitz.

Weitz figures the fair value of each holding and aims to buy at big discounts. Near the trough of the market, his holdings sold for less than half their fair values. Now Weitz figures that his portfolio trades at a 10% discount.

Weitz has long favored subscription businesses that generate reliable income. Favorite holdings include cable TV company Liberty Media (LMCA) and satellite TV provider DirecTV (DTV). "As you build out a cable or satellite system, there are huge up-front capital outlays," he says. "But once you cover the costs, you get very high margins on new subscribers."

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