While the percentage of cash held by mutual funds for the month of September reached its highest level in close to two years, it is still low compared to the five-year average and does not presage a trend, according to the Investment Company Institute of Washington D.C. and industry analysts.

Through 1999, the five-year average of cash held by equity funds was 6.22 percent, according to the ICI. At the end of September, 5.3 percent, or $533 billion of equity funds' assets were invested in cash, up from 4.7 percent in August. That was considerably higher than this year's average of 4.76 percent, but funds' cash investments fluctuate on a monthly basis and September's figures do not portend an upward trend, said Chris Wloszczyna, an ICI spokesperson.

"It's probably [related to] several different factors," he said. "Fund managers might be keeping cash on hand because of market volatility in case of increased redemption activity, but we haven't seen that. Given the volatility, it could be that [portfolio managers] are not seeing stocks they want to invest in. They could be waiting for the dust to settle."

In the past five years, actively-managed funds have allocated ever fewer assets in cash positions, preferring instead to invest as much of the funds' assets as possible in stocks and bonds, said Russ Kinnel, an analyst with Morningstar of Chicago.

"Far fewer are trying to use cash strategically," he said. "You don't see that too much anymore." Fund companies have increasingly embraced the idea that their fund managers are not paid huge salaries to raise cash, he said. Further, September's increase to 5.3 percent was not a drastic increase and is a result of recent market volatility, he said.

Indeed, September's 5.3 percent looks miniscule compared to 1990, when cash levels averaged 11.8 percent and peaked at 12.9 percent in October of that year, according to the ICI.

But, cash reserves held by equity funds overall have risen since September of this year.

That is significant because it marks a shift in portfolio managers' view of the markets, said Charles Biderman, president of TrimTabs.com of Santa Rosa, Calif., an investment research firm. Managers are panicking as they face the first bear market in five years, he said.

"The fact that it's risen as dramatically as it has shows a complete break from greed to fear in how portfolio managers [operate]," he said. A high percentage of fund managers are too young to have the experience of managing a fund through a sinking market and they are beginning to worry about job security, he said.

Since August, funds have taken all of their net inflows and put them into cash investments, Biderman said.

"New flow is going directly to the sidelines and existing holdings are being lightened," he said.

Still, what is motivating most fund managers is open to debate. Several analysts agree that managers have decided to put assets into cash investments because of a range of phenomena all related to market volatility.

One of those is the ongoing battle for the presidency, said Jim Folwell, an analyst with Financial Research Corp. of Boston. Another is the Federal Reserve's unpredictability on interest rates, he said. Still another is the fact that a lot of managers' year-end bonuses are tied to the performance of their funds compared to their relative indices, he said. By investing in cash, managers can improve their performance against their indices, he said.

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