Market volatility has forced stock fund managers to convert a greater percentage of their holdings into cash, sending liquidity ratios to a two-year high in November, according to industry analysts.

"[Fund Managers] got out of losing sectors and they didn't know where to put their money," said Ramy Shaalan, senior funds analyst at Wiesenberger/Thomson Financial of Rockville, Md. Wiesenberger is a subsidiary of Thomson Financial of Stamford, Conn., the publisher of this newsletter.

The percentage of cash held by stock mutual funds reached 6.5 percent of total net assets in November, according to the Investment Company Institute of Washington, D.C.

Although November's cash holdings mark a record, they are not extraordinary compared with historic levels, said Burton Greenwald, president of B.J. Greenwald Associates of Philadelphia, a financial services consulting firm.

"It's close to what years ago was considered to be a traditional figure - somewhere in the five to seven percent range," he said. "But with the kinds of surging markets that we've had, everybody kept pretty much fully invested."

For the first 11 months of 2000, stock funds held an average of 5.02 percent in cash reserves, up from 1999's monthly average of 4.7 percent, according to ICI figures. However, the monthly averages for 1995, 1996, 1997 and 1998 are considerably higher at 7.54 percent, 6.85 percent, 6.43 percent and 5.49 percent, respectively, according to the ICI.

While it appears the average stock fund is increasing its level of liquidity, most likely in order to cover possible redemptions, November's 6.5 percent is more than what is needed to cover significant redemption activity, said Dennis Dolego, director of research for Optima Group of Fairfield, Conn., a mutual fund distribution consulting company.

"I'm sure [funds] have ways to adapt to emergencies," he said. "It seems to me that it's at a high point ... it's more than a reasonable cushion to address the redemption issue."

Still, liquidity ratios will probably not soon drop as low as they have been in the past two years, because most funds over-invested in order to maximize returns in a surging market, Dolego said.

The percentage of cash held by stock funds is not necessarily an indication of rising cash reserves, said John Collins, a spokesperson for the ICI. A 10 percent drop in November of stock funds' total assets was a factor in the large cash positions, he said.

"The percentage rose partly because of the abrupt drop in total assets," Collins said.

Rising cash reserves could indicate that fund managers are either bullish or bearish on the market, Collins said. While value managers may be converting to cash in order to invest at market lows, aggressive growth and technology managers may be girding for increased redemption activity, he said. A manager's sentiments really depends on the market sector in which he invests, he said.

But, stock funds' liquidity ratios reached 6.5 percent in November despite net inflows into those funds, said Rosanne Pane, a spokesperson with Standard & Poor's Fund Services. While the increase in liquidity ratios can be attributed somewhat to an erosion of assets, fund managers have sidelined more money, she said.

"There is some asset erosion," she said. "But managers are holding on to inflows as they come in and not investing as quickly as they did last year."

Also, in recent years, funds have decreased their liquidity ratios as interest rates have steadily dropped, encouraging managers to invest as much of their assets as possible in the markets, she said.

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