The conventional wisdom is to spread your holdings among different types of investments and to include--or maybe stock up on--categories of mutual funds that didn't fare so well in the most recent quarter.
The experts at making these allocation decisions are professional advisors who need to tell their clients what funds to buy or are managers of funds that are designed as dynamic allocation vehicles for investors.
Since the first quarter was again a tough time for many categories that have been underperforming the overall market for several quarters, we were curious about whether these experts are beginning to change their traditional diversification plans.
A close look at these five fund pickers shows changes are indeed afoot. Several of the advisors reveal a desire to search for bargains among investment categories that haven't been hot lately.
Sheldon Jacobs
No-Load Fund Investor newsletter
Irvington-on-Hudson, N.Y.
(800) 252-2042
$135 a year
LIKES: Large U.S. stocks
AVOIDS: Small-cap and real estate stocks
Jacobs generally recommends fairly broad diversification among various asset groups--large and small stocks, foreign equities and bonds. But during the first quarter he found it hard to justify much exposure to mutual funds that focus on small companies, preferring to concentrate on large-stock portfolios. "We're not buying any pure small-cap funds anymore," he says.
Also losing favor with Jacobs were his modest recommendations for real estate funds for moderate and conservative investors. Although popular for years as a high-yielding category that added diversification to stocks, bonds and cash, "they just haven't done anything," says Jacobs, who in his model portfolios advised cutting both the Fidelity Real Estate and Cohen & Steers Realty funds.
He also dropped Neuberger & Berman Partners, a growth fund, and Dodge & Cox Balanced from some model portfolios early in the quarter, but these were modest changes and didn't reflect changing overall asset allocations.
Overall, Jacobs moved his portfolio recommendations more heavily into large-stock funds during the first quarter. Large companies have been on a roll and Jacobs thinks that trend will continue. He also believes they would hold up better than small issues in a bear market, although he's not expecting to see one any time soon.
Jacobs particularly likes those large-stock funds that own a concentrated mix of perhaps two dozen or fewer companies.
"The fewer stocks you have, the better your chances of beating the market indexes," he says. His favorite large-stock funds include Marsico Focus, PBHG Large Cap 20 and Strong Growth 20.
Paul Merriman
Merriman Funds
Seattle
(800) 423-4893
LIKES: Large U.S. stocks, cash
AVOIDS: Foreign stocks
A market timer, Merriman follows more than 20 timing indicators that track such things as price trends, volume readings, ratios of advancing and declining stocks, new highs versus new lows and a whole lot more. "It's a mechanical, trend-following system from which we hope to generate decent returns while protecting people, one day at a time, against a massive bear market that might never come," he says.
Merriman runs five market-timing mutual funds that invest in other mutual funds on a no-load basis. He made only a few changes in his portfolios during the first quarter.
For example, the Merriman Capital Appreciation portfolio started the year 55% in U.S. stocks, 24% in foreign equities and 21% in cash.
Today, its posture is a bit more guarded at 50% in U.S. stocks, 13% in foreign stocks and the remainder in cash. When fully invested, Capital Appreciation can hold 65% of its assets in U.S. stocks and the rest in foreign equities. Current investments range from American Century Ultra, Stein Roe Growth Stock, T. Rowe Price Europe and Colonial Newport Tiger--all added during the quarter--to Montag & Caldwell Growth and Hotchkis & Wiley International.
The Merriman Flexible Bond portfolio applies a market-timing system to the bond market--specifically foreign, junk and high-grade U.S. government and corporate issues. The fund has been totally out of high-grade issues since last year. Junk-bond and foreign-bond funds each make up a quarter of assets, a moderate increase from the end of 1998.
Note that Merriman invests in funds that are performing well; beyond that, he doesn't do fundamental research and he doesn't harbor strong preferences for his choices. "When you're a mechanical, trend-following market timer, the particular funds you hold don't really mean anything."
Stephen Janachowski
Brouwer & Janachowski
San Francisco
(415) 435-8330
WHAT HE LIKES: Large U.S. stocks
WHAT HE AVOIDS: International stocks
Janachowski and partner Kurt Brouwer manage portfolios of mutual funds for clients with $1 million or more in assets. They favor funds whose managers seek capital appreciation at a reasonable price, a philosophy that shifts them toward a mix of both growth and value stocks.
