Since November, when the amount of cash held by equity funds reached its highest level in nearly three years, liquidity ratios have stabilized while markets have steadily declined, indicating weak markets have not kept fund managers from investing their assets, according to industry analysts.

Although there may be other contributing factors as well, a relatively low level of redemption activity relative to market performance may have encouraged some managers to invest a greater percentage of their assets, according to analysts.

The amount of cash a particular fund holds is largely dependent on its investment style, but the average equity fund's cash level peaked in November and declined and stabilized since then, according to data provided by the Investment Company Institute of Washington D.C. Cash levels in November were the highest for 2000 and have remained below that level for the first two months of this year.

While the poor market performance has depressed sales, redemption activity may not have risen as much as some managers may have anticipated, said Donald Cassidy, a senior analyst with Lipper of Summit, N.J.

Average equity fund liquidity ratios reached 6.5 percent in November but dropped in December to 5.8 percent and continued to fall in January to 5.6 percent, according to the ICI. In February, cash levels climbed to 5.9 percent, which is not far from the five-year average of 5.7 percent, according to ICI figures.

At the same time, market performance since November has been highly volatile, but fund investors appear to be holding on to their shares, Cassidy said.

"Selling is a funny thing," he said. "People tend to get mentally locked in and they don't want to sell."

In December, $87.5 million flowed out of stock funds, just $5.5 million more than in December 1999, according to the ICI. In January, redemption levels for stock funds were just $717,000 more than they were the previous January and in February, stock fund redemptions were $16 million less than the previous February's, according to ICI figures.

Aside from initial concerns about redemption levels, managers may have raised their stake in cash in November because of capital gains concerns, Cassidy said.

"I think [managers] may have overestimated redemptions for tax losses," he said. "There were a tremendous amount of articles at the time written about capital gains." Managers may have been concerned that investors would want to offset capital gains by selling some fund shares at a loss at the end of the year, he said.

Also, fund managers may have been worried about investors not reinvesting their dividends in December and converted a greater percentage of their assets into cash, Cassidy said.

But since it turns out that most investors seem to be holding on to their fund shares, managers may be investing a greater percentage in the market, he said.

Another factor that has probably affected liquidity ratios is fund managers' fear of missing a market rebound, said Kunal Kapoor, senior fund analyst with Morningstar of Chicago. With the Federal Reserve easing interest rates four times so far this year, managers may be anticipating a market rebound, he said.

And managers may be looking for value buys, believing the worst of the markets' woes are passed, Cassidy said.

However, with preliminary flow estimates from Lipper of Summit, N.J. and Financial Research Corp. of Boston indicating a sharp rise in redemption activity in March, managers may want to exercise some caution, said Neil Epstein, an analyst with Putnam, Lovell, de Guardiola & Thornton of New York.

Given that liquidity ratios are more closely tied to redemption activity than to interest rates or tax consequences, it would not be surprising to see funds' liquidity ratios spike to last November's levels in the next few months, he said.

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