Despite a pickup during 2010 in acquisitions, share buybacks and dividend increases, cash on corporate balance sheets remains high for S&P 500 Index companies. But according to research from Standard & Poor’s, non-U.S. corporations are also sitting on sizable war chests and could begin to put this cash to work in shareholder-friendly ways, which would be a positive for stock and mutual fund owners.
S&P Valuation and Risk Strategies (VRS) research team examined the top 50 publicly traded companies globally, excluding financials, ranked by their latest reported quarter's total cash and short-term investment holdings. The sum total for these companies' cash balances was approximately $1.08 trillion, nearly matching the cash holding total for the entire S&P 500 Index.
While 17 U.S.-based companies were among the top 50 global corporate cash holders, two-thirds of the top 50 global cash holding companies are headquartered outside of the United States. Indeed, 17 European-based companies made the list with a collective $288 billion in cash. Meanwhile, 13 Asia and Australian domiciled companies were in the global top 50 with a collective $270 billion; China Telecom, Honda Motor, Nintendo, Samsung Electronics, Siemens, Total SA and Vodafone are examples of international companies that made the list, joining such companies as General Electric and Microsoft.
With the abundance of capital abroad, the likelihood exists for greater activity in cross-border mergers and acquisitions as well as for strong earnings growth outside the United States, according to S&P VRS. In addition, companies that have sizable cash balances are more likely to have strong credit profiles, which S&P believes is an important risk consideration for mutual fund investors.
S&P sought four- or five-star ranked international equity mutual funds that not only outperformed their peer group on a three-year basis, but also had at least two holdings within their latest top 10 that had sizable cash holdings.
Dreyfus International Stock Fund (DISAX)−This S&P four-star ranked fund generated a 1.3% annualized three-year total return through December 2010, outpacing its large-cap growth peers by more than 600 basis points while incurring a below-average standard deviation.
Also supporting the high ranking from S&P are the fund's positive risk considerations scores for the S&P Quality Ranking and S&P Credit Ratings (which are determined independently from S&P Equity Research) of its holdings as of November 2010.
The fund's top-10 positions list includes Honda Motor and Nintendo, two companies with strong recent cash balances and S&P Quality Rankings of A; approximately half of the fund's assets are invested in developed Asian markets.
Templeton Foreign Fund (TEMFX)−This S&P four-star-ranked international large cap core fund has outperformed its peers in three of four calendar years since Tucker Scott became the manager in 2007, and TEMFX's three-year annualized total return ended December 2010 was 340 basis points stronger than its peers. Within the fund's latest available top 10 holdings are cash-rich Samsung Electronics and Vodafone Group, which both have investment-grade credit ratings from S&P Ratings Services.
Meanwhile, TEMFX, which has approximately two-thirds of its assets in developed European markets, has a below-average net expense ratio of 1.2% and only a 16% turnover rate.
Wells Fargo Advantage Emerging Markets Equity Fund (EMGAX)−Unlike DISAX and TEMFX, which are invested more in developed international markets, this five-star ranked fund invests primarily in Asian and Latin American emerging markets, and has done so with recent success. The fund's three-year annualized total return of 3.4% through December 2010 was more than 600 basis points stronger than its emerging market peer group, while the fund has incurred relatively muted volatility. Recent top 10 holdings included China Mobile and Petroleo Brasiliero (Petrobras), which were both on the S&P list of companies with strong cash balances.