For fund managers with cash, the devastation wrought by the plunging stock markets of the past few months has served up a rare opportunity to gild portfolios with attractively priced acquisitions.

A number of money managers were sitting with higher than normal cash positions going into the rough waters of this past autumn, having sold stocks that had reached full value. Others quickly raised cash when the September bankruptcy of New York-based Lehman Brothers Holdings Inc. signalled extreme danger in financial markets. These money managers have been able to reinvest as prices have fallen even further in the ensuing months.

Perhaps the luckiest of all money managers were those who found themselves launching equities funds in the autumn. Unburdened by earlier choices, managers of new funds launched by Edgepoint Capital Partners Inc., BluMont Capital Corp. and Sprott Asset Management Inc., all of Toronto, have had a smorgasbord of attractively priced stocks from which to choose.

Sprott All Cap Fund was launched on Sept. 18, 2008, as the first storms were breaking in stock markets. As cash has come in, co-manager and investment strategist Jamie Horvat has used “down” days in the market to pick up shares in attractive companies. On the stronger days, he has taken advantage of the opportunity to sell short in areas such as leisure products, luxury retailers and homebuilders. The Sprott fund is permitted to hold short positions for up to 20% of its assets.

“We expect to see sideways, volatile markets for the next 14 to 16 months,” Horvat says. “But this is one of the best buying opportunities that many people will experience in their lifetimes. We’re picking up companies with little or no debt, solid balance sheets and strong cash flow, for which we see growth happening.”

Infrastructure spending stimulus by governments is a positive theme, Horvat says, and the Sprott fund has assembled positions in engineering and construction companies that should benefit from the work generated by new projects, including Jacobs Engineering Group of Edmonton and U.S.-based McDermott International Inc.

And with China planning to spend US$586 billion on infrastructure over the next two years, Horvat says, materials companies will benefit. Negative sentiment has pushed some stocks so low in price, he adds, that they are trading at the value of the cash on their balance sheets, with no value given to the businesses.

Health-care and consumer staples companies with strong dividends are also being added for safety and stability. The Sprott fund’s biggest holding is in gold bullion, accounting for 9% of assets. Massive government spending in countries around the world will ultimately be financed by the printing of currency, which Horvat believes will weaken and boost gold prices.

Tye Bousada, president of Edgepoint, has been putting money to work for affiliated company Cymbria Capital Corp. of Toronto, an investment firm whose closed-end pool raised about $234 million in early November. Money is also starting to flow into four retail mutual funds launched by Edgepoint in mid-November, and it is being invested in a similar fashion as for Cymbria. Bousada says about 90% of assets have been invested.

“This is an excellent opportunity to buy businesses, but we are definitely not in the camp of saying everything is cheap,” Bousada says. “It’s important to be selective. A number of businesses may not be around in three years if the economy doesn’t turn around. Cheap companies can always get cheaper.”

The world is in a state of corporate and personal deleveraging, Bousada says, after years of excessively loose credit and unsustainable overspending. He foresees a period of lower consumption and higher savings that will probably result in lower growth in gross domestic product over the next five years vs the previous five years.

Cymbria’s top 10 holdings are a mix of global names, including health benefits company Wellpoint Inc. of Indianapolis; Moody’s Corp., the New York-based parent of the research and ratings firm; and Waterloo, Ont.-based Research In Motion Ltd.

Bousada, along with co-manager and chief investment officer Geoff MacDonald, had been planning their picks in advance of launching the Cymbria and Edgepoint funds, so they were able to move quickly and pick up crown jewels at deeply discounted prices. Bousada is not buying companies that are typically described as defensive, such as pharmaceuticals, grocery stores or utilities; he prefers to walk on less travelled paths, on which better values can be found.

@page_break@Larry Sarbit, president of Win-nipeg-based Sarbit Asset Management Inc., was almost entirely in cash in the four strongly bullish years that preceded 2008. He now holds about 60% cash in Sarbit U.S. Equity Trust, the one fund he is still managing since the sale of his fund family toIndustrial Alliance Insurance & Financial Services Inc. of Quebec City this past fall.

“The environment has changed dramatically and created opportunities for scavengers like me,” Sarbit says. “We’ve added a number of names at good prices. The markets were discounting horror in 2008, but we can’t know if they’re accurately discounting what’s going to happen in 2009. It’s looking foggy, and one needs to drive slowly and stop frequently to make sure there’s no fallen trees on the road.”

One of Sarbit’s recent buys is California-based eBay Inc., the dominant online merchandiser. The firm is a big cash producer in a business that is not capital-intensive, he says. He has also bought shares in PayPal Inc., which provides credit card payment facilities for online retailers. He also likes Ituran Location and Control Ltd., a maker of location devices for machinery and automobiles that may benefit from an increase in theft during these tough times.

“You want to be in companies that don’t require a lot of capital and don’t need to borrow,” Sarbit says. “If they generate excess cash, they won’t be paying a visit to their banker, who may not want to lend.”

Irwin Michael, president of I.A. Michael Investment Counsel Ltd. of Toronto, moved quickly to cull portfolios of vulnerable stocks and raise cash in September, bringing cash to as high as 20% of assets in his family of ABC equity funds.

“The dynamics changed suddenly,” Michael says, “and we culled our portfolio of securities that concerned us, in view of what was happening to the banking system and to commodities prices.”

As stock prices fell further toward yearend, he bought shares in attractive, large-cap companies at discounts he “never expected to see.” Enticed by high dividend yields, he picked up shares in financial services firms Toronto-Dominion Bank, Royal Bank of Canada, Bank of Montreal and Manulife Financial Corp., all based in Toronto.

“We are deep-value investors and go where we see value,” Michael says. “We’re seeking good companies with strong yields that can still do well in this environment. When you can get a dividend yield of 5%- 7% on good companies, with potential for capital gains as well, what a great time to be in the market.”

Veronika Hirsch, CIO of BluMont, has also found herself having high levels of cash going into tough markets, particularly in Exemplar Canadian Focus Fund, which BluMont introduced in May 2008. She has been treading carefully, and the fund is only 22% invested: “We will likely stay underinvested in the first half of 2009. The trick right now is to get the right names, because if you lose money in a bad market, it’s tough to make it back. In a bull market, if you lose money on one name, you can make it up on another.”

Hirsch is avoiding financial services stocks such as banks and insurance companies, as she is concerned they may have latent balance-sheet problems. However, she does like TMX Group Inc., which she calls a “quasi-monopoly with no credit issues.” She is also buying some big names in resources — Freeport-McMoRan Copper & Gold Inc., Canadian Natural Resources Ltd. and gold miner Nexus Inc. — in anticipation of a rally. But she is making no long-term commitments and is trading in and out frequently. IE