Cash can be your friend or enemy

I was interviewed by Julie Steinberg of the WSJ for an article that appeared this week ("These Two Funds Picked a Really Bad Day to Debut," August 5, page R1) regarding the impact contributions can have on a mutual fund's performance. While time-weighted returns eliminate the impact of the flows (by bifurcating the period before and after the flow), it does nothing for the cash's potential drag or boost of a fund's perfor-

mance, if it ends up not being invested immediately.

The delay in investing new cash can be (a) because the market is not that liquid, (b) because the manager wants to hold off on putting the money to work (which can be for a variety of reasons), (c) to be available for market timers, who, when they sell, demand payment quickly (before trades would settle), (d) probably other reasons unknown or not recalled by me at this time.

If there's more cash than the manager would typically have sitting around for any length of time in an up market, returns can suffer; if, however, the cash is hanging around in a down market, then there can be a benefit to having it not yet invested. Since mutual fund investors will likely not be able to see what goes on day-to-day, the impact of cash won't typically be known.

I also mentioned that an investor's returns will usually be quite different from the fund's, because of contributions and/or withdrawals the investor makes during the period. He/she/they should ideally see a "personal rate of return" (read: money-weighted) to know how they are doing (in addition to the fund's (time-weighted) return). More and more fund families offer this.

The WSJ relentlessly tries to educate retail investors, and I think this was a great article in that it provides investors some insights into this important topic.