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Making a Wish List Now Will Give You a Head Start on Next Bull Run

October 25, 1998|PAUL J. LIM

Let's assume, for the sake of argument, that the recent spate of market volatility is over.

That the correction that began this summer is coming to an end. And that the bull market is ready to run once more.

Clearly, it's too soon to make such a call. But suppose it's true, and suppose you're ready to come off the sidelines and expand your stock mutual fund portfolio.

Which funds are you ready to add? Berger Select, a mid-cap growth fund? Pimco Innovation, a highflying technology fund? Schroder Micro-Cap, which is keeping pace with larger-stock funds, certainly looks good.

Don't know? You should.

If you're a fund investor, you should always keep a wish list of funds you're ready to pounce on once circumstances are right, financial planners say. Especially in uncertain times such as these.

How can you tell when circumstances are right?

You can't. No one knows when the market or a particular sector will be ready to make a move, up or down. So having a list prepared will allow you to take full advantage of opportunities that present themselves.


Why can't you put it off?

Because stocks, especially those that are out of favor, can easily get away from you.

Take small caps. John Rekenthaler, director of research for mutual fund tracker Morningstar Inc., notes that small-cap stocks had languished for years leading up to 1990. "Then small caps had a big fourth quarter that year, gaining anywhere from 10% to 30% more than most large caps. If you had waited for the turnaround [and gotten in even a quarter late], you'd have missed up to 75% of those gains."

Albert King, executive vice president for China Securities Investment Trust Corp. in Taipei, Taiwan, makes the same argument for emerging-market funds, which haven't had a really good year since 1993, when the average diversified emerging-market fund gained 72.2%. (Some, such as the Morgan Stanley Emerging Markets fund, gained more than 85%.)

So if that's the case, why not go ahead and invest in those funds on your list right now?

For some of you, that might not be a bad idea. Indeed, you should always be invested in a diverse mix of funds. A wish list, however, will help you (1) replace laggards in your current portfolio and (2) add positions in sectors that are coming into favor.

Wish lists are also useful for those who want to wait because they aren't convinced that the stock market has settled down, or fear that funds are about to make capital gains tax distributions (as most do at the end of the year).

Keep in mind that your list doesn't have to be that long. Chances are two or three will suffice, especially if you don't have that much extra cash to invest. What your list should be, though, is diverse--in other words, your list shouldn't be made up exclusively of large-cap stock funds that mirror the benchmark Standard & Poor's 500 index.


Why not? Because the S&P 500 has led the market for much of the last four years. And generally when markets correct, the stocks that eventually lead those markets coming out aren't the same as those that led going in.

Larry Speidell, director of global portfolio management and research at Nicholas-Applegate in San Diego, looked at market leaders in the past, based on risk-reward characteristics.

Here's what he found: For five years, bonds led the way. For the next five years, small-cap stocks took charge. Then S&P 500 stocks caught up with the small caps. After that, international stocks ruled. That was followed by a breakout period for emerging-market stocks. Now we're back to the U.S. blue chips.

Despite all the turn-taking, Speidell thinks investors will still favor domestic blue chips once the current correction is definitively over.

"That's what most investors do. They look backward," Speidell said.

Thomas Barry, director of investment at the Los Angeles-based money management firm George D. Bjurman & Associates, refers to this as "rowboat thinking."

"You're always looking backward to go forward," he said.

If you want to look forward, make sure your wish list includes one or two small-cap names, such as Ariel Growth, John Rogers' small-cap portfolio; Royce Total Return, run by the legendary small-cap manager Charles Royce; and Fasciano, a lesser-known but equally good small-cap fund.

You may also want to include a few emerging-market funds, such as Nicholas-Applegate Emerging Countries, which has outclassed at least 75% of its peers every year since inception; Templeton Developing Markets, run by emerging-market guru Mark Mobius; or Evergreen Emerging Markets, which has beaten 97% of its peers over the last one- and three-year periods.


Times staff writer Paul J. Lim can be reached by e-mail at

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