Fidelity's Tillinghast cuts cash position, bets on mattresses

* Tillinghast buys Tempur-Pedic

* Low-Priced Stock Fund uses cash as shock absorber

* Investors still wary of stock funds

By Tim McLaughlin

BOSTON, Oct 3 (Reuters) - Fidelity Investments' Joel Tillinghast, one of the best U.S. stockpickers over the past 20 years, has reduced his cash holdings dramatically, a sign he is making one of his biggest bets in the stock market in a decade.

Tillinghast, manager of Fidelity's $33 billion Low-Priced Stock Fund , has cut his cash position by more than half in the past year to $1.9 billion, or 6 percent of assets.

"We did this in order to take advantage of the low stock prices that followed last summer's market sell-off, establishing new positions in companies whose stock prices fell below $35 per share - including high-end mattress maker Tempur-Pedic International ," Tillinghast said in a recent manager's overview for investors.

His relative cash position is the lowest it has been since 2003, when the fund had $1.6 billion in cash, or 8 percent of $19.6 billion in net assets, U.S. regulatory filings show.

Over the past decade, Tillinghast, 54, has sat on big piles of cash to absorb shocks to the stock market. Sometimes that conservative position has hurt his performance. In 2011, he had too much cash squirreled away in a rising market.

"He has a very strong track record," said S&P Capital IQ mutual fund analyst Todd Rosenbluth. "It's a fund that has some good risk controls. Volatility is low compared to similar funds. The cash provides some downside protection."

Indeed, Tillinghast said in filings that his "hefty stake in cash" amid the financial crisis limited his losses. Low-Priced Stock Fund's retail shares, for example, fell 14 percent during the 12 months ended July 31, 2009, while the benchmark Russell 2000 Index plummeted 21 percent.

Even at the end of July 2011, Tillinghast's cash position remained elevated at nearly $5 billion, or 13.5 percent of his fund's net assets.

After returning in January from a four-month sabbatical, Tillinghast focused on picking new stocks and adding to established positions. In his absence, a team led by James Harmon ran the fund.

In the fiscal year ended July 31, Tillinghast and his team increased his positions in office products retailer Staples Inc , software giant Microsoft Corp and Seagate Technology Plc . Those moves, along with his position in Tempur-Pedic (4.25 million shares), have helped his performance.

Tempur-Pedic shares traded above $80 in April but plummeted after the company failed to raise its forecast for the first time in two years.

Tillinghast, whose fund specializes in stocks that cost less than $35 a share, took advantage of the fall. Tempur-Pedic is now trading around $31 and is up 38 percent since early July.

For the year to date, Tillinghast's fund has posted a 15.16 percent return, beating 87 percent of his mid-cap core fund peers, according to Lipper Inc, a Thomson Reuters company. Over the past decade, Tillinghast has beaten 93 percent of his peers and has generated an annualized return of nearly 14 percent since he began running the fund in December 1989, according to Lipper.

Still, investors have pulled nearly $2 billion out of the fund in the past year. But Low-Priced Stock Fund isn't alone.

In August, investors were not convinced by positive returns in conventional stock mutual funds, posting net redemptions of $1.3 billion, while bond funds attracted $32.4 billion, said Tom Roseen, head of Lipper research services. It was the 16th straight month of outflows for U.S. stock funds.

In contrast, exchange-traded funds (ETFs) posted their ninth consecutive month of net inflows, for a year-to-date total of $84 billion, Lipper said.

"While Low-Priced Stock is a relatively cheap mutual fund, it's still higher than what you might find in an ETF," Rosenbluth said.

(Reporting By Tim McLaughlin; editing by John Wallace)

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