In the early 1990s, the most successful mutual fund at the time was Fidelities Magellan Fund. This was a time when active investing mutual funds were playing the role that hedge funds seem to be playing today as they have become more dominant. Magellan fund was the largest in the world and run by Jeffrey Vinek.

Magellan held a lot of cash between 1993-1996 as the stock market was making its run toward internet peak. He was criticized for doing it and eventually resigned in 1996, facing huge criticism for not being more fully invested.

Because Magellan was the largest mutual fund, there was lot of debate about whether managers had the right to be in so much cash if they are an equity growth fund. After all investors can make their own allocation decisions to be in money market mutual funds if they wanted to be more conservative. This debate and what happened at Magellan lead to mutual funds introducing policies that set minimum/maximum cash holding in their funds.

I can’t imagine this actually prevents decline. These policies have been in place for at least two market downturns. Ultimately investors themselves make decisions about whether to pull money out or not from the market. I do think that investors have become incredibly sanguine about risk and have been right to stay invested at all times. A market crash with real consequences is the occasional thing that has to happen to remind us all it’s a risky thing we engage in. But there is a powerful lesson in how an event like COVID, which should have destroyed market valuations, only resulted in bull market opportunity. If that didn’t create a sustained crash, what could possibly do it. The equity risk premium is about as low as I have seen it (speaking by my gut, not mathematically derived)since the internet boom.