Weitz funds hold more in cash against overvalued stocks

July 15 Tue Jul 15, 2014 5:48pm EDT

July 15 (Reuters) - High stock prices are making cash a more attractive option for long-term returns, Weitz Investment Management said in a letter to investors, though the move away from equities cut into the firm's performance in the first half of 2014.

Wallace Weitz, president of the firm, and Brad Hinton, director of research, said in the letter sent to shareholders earlier this month that cash levels are in the "mid- to upper- 20 percent" range in its six funds, a higher-than-normal level.

The firm, best known for its Lipper Award-winning Weitz Hickory Fund, noted that the Federal Reserve's measures to provide liquidity, via its bond-buying program, and near-zero interest rates have encouraged many investors to keep buying stocks, but said it has been "wary" about the level of stock prices, prompting it to hold more cash.

"We think the 'opportunity cost' of holding out for better values is slight and that we will be rewarded for our patience," Weitz and Hinton wrote.

On Tuesday, Weitz said his outlook for the market would not be influenced by remarks that Fed Chair Janet Yellen made earlier in the day that many biotechnology and social media stocks have "stretched" valuations.

"These moves can be accelerated or bounced around by headlines from the Fed, but it doesn't really affect the longterm," Weitz told Reuters.

The high levels of cash held by Weitz funds, at a time when the S&P 500 rose 6.78 percent over the first half of the year, cut into the firm's returns. Across the firms' six stock funds, - which have nearly $4.08 billion in combined assets under management - second-quarter growth ranged from 1.40 percent to 3.16 percent, with the Weitz Research Fund the best performer.

For the trailing 12 months, the firm's best-performing fund is up 17.92 percent, compared with a 17.31 percent gain in the S&P 500.

High stock prices, rare bargains and low volatility are creating unfavorable market conditions, Weitz wrote. Prices aren't fluctuating rapidly enough for the firm to buy under-valuated stocks.

"We have to be patient when there is little buying and selling to be done, and prepared - with researched investment ideas and cash - to act when opportunity arises," Weitz and Hinton wrote.

The firm's largest positions are in ADT and Liberty Interactive Class A, according to Morningstar data.

The firm said it is on the lookout for companies that are building the value of their business through acquisitions, restructurings, entering new businesses or buying back shares. Its position in Valeant, for example, has risen nearly 32 percent this year as it has pursued a bid for Allergan , while its shares of DirectTV have rallied 33 percent on a takeover offer from AT&T. (Reporting by Michael Leibel; Editing by Leslie Adler)