(MONEY Magazine) – Hottest Pros Turn Cool on Stocks

Value funds have pounded growth funds for most of the past five years, but now some top value managers, including Mario Gabelli and the team at Longleaf Partners, have moved to the sidelines and are sitting on huge stashes of uninvested cash. At a minimum that suggests the managers don't see a lot of bargains. At the extreme it suggests stocks are way overvalued.

"Value has done really well, and that has clearly cut off some opportunities," says Morningstar fund analysis director Kunal Kapoor. Though the market doesn't feel buoyant, it's up 39% from the 2002 low, and much of the bounce came from stocks that had been trading at low price-to-earnings ratios, exactly the kinds of stocks that value managers like to own. "If there's nothing worth buying, cash goes up," says Michael Sandler, co-manager of the Clipper fund, which now has a 28% cash stake.

FPA Crescent's Steven Romick expects the market to return just 4% to 7% a year for the next decade. "The risk to hold cash is as low as it's been in my 20-year career," says Romick. He's got 40% of his portfolio in cash.

But should you pay management fees to these funds if their managers aren't investing? Well, yes. Remember the late '90s, when value managers were ridiculed for not embracing tech? Soon after, they saved their investors in the bear market, and they led the bull charge that followed. "Their historical returns prove they can get ahead of the market," says Lipper research analyst Jeff Tjornehoj. "And stockpiling cash allows them to put their money where their mouths are." --TARA KALWARSKI

Equity funds gained steam, with many posting double-digit returns for the three-month period.

NOTES AND SOURCES: Unless otherwise noted, data as of July 21 from Lipper, New York; 877-955-4773. [1] Annualized. N.A.: Not applicable.