Weatherproof Your Investments - Statistical Data Included

Kiplinger's Personal Finance Magazine, March, 2001 by Jeffrey R. Kosnett

A mixed year for hybrids

AND WHAT about these traditional all-weather funds? In particular, how did they hold up in 2000, the market's first down year in a decade? Helped by strong gains in bonds and a surge in value stocks late last year, 54% of the hybrids ended 2000 in the black, reports Morningstar--a fair achievement considering that the S&P 500 lost 9%.

Arguably, though, the hybrids should have done even better, because 2000 was an excellent year for bonds, as well as for utilities, real estate investment trusts and other income investments. The reason they didn't is that many offset their bond profits with losses from stocks such as Cisco, Intel and Microsoft. Many all-weather-fund managers "fell into the temptation of trying to play the performance game" to look better relative to the celebrated growth stars, says Clyde McGregor, manager of Oakmark Equity & Income (800-625-6275), a balanced fund that stayed with bonds and undervalued stocks and earned an enviable 20% in 2000 (coming on top of an 8% gain the previous year).

Another alternative

SOME FINANCIAL advisers believe there is another kind of fund that can achieve the twin goals of capturing the returns from rising stocks while dampening volatility. So-called long-short funds are a relatively new category because it took a regulatory change to make it more practical for mutual funds to sell stocks short (a bet on lower share prices). These funds typically own stocks and bonds and also sell stocks (or stock indexes) short as a hedge. Some investors consider short-selling almost un-American, but the concept is worth considering the next time you start getting nervous about the market.

Think of long-short funds as "kinder, gentler hedge funds," says Rick Lake of the Lake Partners, a Greenwich, Conn., investment-management firm, who supervises portfolios composed of these funds. Lake observes that in November 2000, when the S&P 500 fell 8%, his portfolio of hedged mutual funds gained 0.3%. From the end of 1998 to November, Lake claims a 40% gain versus 10% for the S&P 500 and 10% for the Lehman Brothers bond index.

One no-load fund Lake follows could be just the right anchor for all sorts of weather. It's Leuthold Core Investment fund (800-273-6886), sponsored by Leuthold Weeden Capital Management, part of a Minneapolis firm known for its scholarly market expertise. This fund, which returned 23% in 2000 and has earned at least 9% each of its five years, works to "make what we keep and keep what we make," says managing director Ed Favreau.

The fund shifts its allocation monthly. Recently, 50% of assets were in stocks, 38% in (mostly corporate) bonds and 12% in cash. It avoids stocks that sell at high ratios of price to earnings, and hedges by "running a short portfolio inside," as Favreau explains. Given the fund's value bent, its 11% gain during the Nasdaq bear market wasn't totally unexpected. But the fund truly showed its mettle during the brief 1998 down market, in which it lost just 0.6%. Its annualized five-year return of 14% trails that of the S&P 500 by fewer than five percentage points. "It's a safe, sane, comfort-level fund," Favreau says. And that's something even the hardiest of investors wishes for in times like these.