A fund investor's S.O.S.
Stocks are overvalued, bonds are struggling. What should you do?
NEW YORK (CNNfn) - Mutual fund investors may be feeling as if they are trapped in a bad episode of "Let's Make a Deal."
Behind door No. 1 is a stock market that is nearing the end of a record run. Behind door No. 2 is a bond market that is sagging in a nasty downturn.
And now the game show host, Fed Chairman Alan Greenspan, may up the ante by raising interest rates.
It's a choice between bad and worse. Which door should an investor choose?
"Where the heck can we put our money?" a reader wrote to me recently.
Rich Stevens, a principal of personal finance services at fund giant Vanguard Group, said the best thing to do is stick with your investment strategy and asset allocation plan.
"Our methodology is investing for long-term periods and not trying to bet in any material way where the stock market is going, or which way interest rates are going," Stevens said.
Anybody who is investing for less than five years belongs in a money market fund, he said.
But Stevens added that you may want to make some fine-tuning adjustments to your portfolio to account for what is happening on Wall Street.
For example, he is underweighting equities for his clients because he thinks stocks are overvalued. That means a person whose portfolio is 60 percent stocks and 40 percent bonds might shift the percentages to 55 percent stocks, 40 percent bonds and the rest in short-term bond funds and money market funds.
"Most of our tactical shifting is to reduce risk," Stevens said.
That said, Stevens pointed out that a person could have asked the same question about investing three years ago. At that time, as appears to be the case today, stocks were overvalued and interest rates were low.
"You could have said interest rates had nowhere to go but up, just as you could have said the stock market had nowhere to go but down," Stevens said. "If you didn't invest in stocks and bonds you would have missed the best three years ever in the market."
The "perfect stock" might not exist except in our imagination, but fund manager Harindra de Silva said he is building a portfolio of companies that together share the traits of one.
de Silva, manager of the UAM Analytic Enhanced Equity Fund, looks for stocks in the S&P 500 index that have a low price to earnings ratio, a high return on equity, high growth and high momentum. (The p/e is the price of a stock divided by its earnings per share, while the r.o.e. is the percentage earned on a stock investment in a given time).
The fund, with $45.3 million in assets, has five out of five stars for risk-adjusted returns at Morningstar, a Chicago fund-tracker.
The fund is up 12.66 percent year to date as of Thursday and is in the top 9th percentile of its category, Morningstar said. The fund earned 37.82 percent in 1998 and 29.83 percent in 1997 and is ranked first in its category over three years.
de Silva said managers have a harder time beating their benchmarks and the S&P 500 because so much information is available to investors these days. (Only about 5 percent of managers beat their benchmarks, according to industry statistics).
"It's gotten harder for professional money managers to add value," he said. "With all the information available, they can't add value. That tells me you need a more intelligent way of using the information you have."
In de Silva's fund, he looks at the S&P 500 every month to pick which stocks have the "perfect stock" traits. (That also means the fund has a very high turnover rate of 297 percent a year, according to Morningstar).
As of May 31, the top holdings include a 5.05 percent stake in General Electric (GE), a 3.59 percent stake in IBM (IBM), and a 3.16 percent stake in Procter & Gamble (PG). Other top holdings include Merck (MRK), Exxon (XON), Citigroup (C) and Microsoft (MSFT).
He doesn't have any favorite stocks, comparing his selections to a Caesar salad.
"I don't like anchovies. I'm not a fan of raw eggs and I don't like plain salad," de Silva said. "It's the right mix that makes it work."
There were a number of big moves in the fund business recently. One notable change is that Robert Doll, chief investment officer at Oppenheimer Funds, is moving to Merrill Lynch as chief investment officer for equities.
American Century Select Fund also had a shakeup recently when two managers on the team, Jean Ledford and Richard Welsh, left. The new team includes co-manager Kenneth Crawford and James Stowers 3rd, who is chief executive of American Century Investments.
And Jim McCall, star manager at Pilgrim Baxter & Associates, is no longer running the PBHG Large Cap Growth Fund, Core Growth Fund or Select Equity Fund. McCall is locked in a nasty legal spat with Pilgrim Baxter over his efforts to leave for Merrill Lynch Asset Management. Management teams led by Gary Pilgrim are running the funds now.
Meanwhile, Tim O'Brien, who had managed Eaton Vance Utilities Fund, moved to Gabelli Asset Management. He will manage a new utility fund called Gabelli Utility Fund. Gabelli has filed paperwork on the fund and hopes to open it in August.
O'Brien also will act as an adviser to Gabelli Utility Trust, a closed-end fund that is a spinoff of the existing Gabelli Equity Trust. The new spinoff fund will be listed on the New York Stock Exchange under the ticker "GUT." Shareholders of the old fund will get one share of the new fund.
Finally, some financial advisers have been recommending growth and income funds as a way to cushion the affects of a volatile market. The funds invest in dividend-paying stocks and sometimes bonds. Here are some winners and losers for the week, according to Lipper Analytical Services.
At the top of the list is CCB Equity Fund, up 3.54 percent for the week June 10 to June 17 and up 7.43 percent year to date; followed by Centura Large Cap Equity Fund, class C shares, up 3.28 percent for the week and up 9.51 percent year to date; and Evergreen Select Equity Income Fund, institutional shares, up 3.18 percent for the week but down 0.72 percent year to date.
At the bottom of the list, the biggest loser of the week was Heartland Value Plus Fund, down 1.04 percent for the week but up 5.47 percent year to date; followed by Excelsior Income & Growth Fund, down 0.51 percent for the week but up 8.31 percent year to date; and FAM Equity-Income Fund, down 0.15 percent for the week and down 2.25 percent year to date.
For more information on growth and income funds, CNNfn.com's Lipper fund report has a list of the top winners and losers in the category over 13 weeks.
-- Staff writer Martine Costello covers mutual funds for CNNfn.com. If you have any comments you can contact her at firstname.lastname@example.org