A new home; as soon as possible

Kiplinger's Personal Finance Magazine, March, 1998 by Manuel Schiffres

Brian Hanson and his wife, Karen Alter-Hanson, are saving both for the long term and for medium-term goals such as buying a house and traveling. They therefore favor investments, such as Yacktman fund, that they hope will fare well in a less-hospitable environment than the one investors have experienced the past three years. Yacktman fund "invests in strong companies out of favor with Wall Street," says Hanson, a doctoral candidate at the Massachusetts Institute of Technology, in Cambridge. "We're comfortable with that philosopby. It's yielded good performance when the market has done well, but what I like about the approach is that it makes sense for times when the market is tougher."

When saving for a big purchase only a few years away, as many future home buyers do, it's prudent to avoid overly aggressive funds. So we picked stock funds for this portfolio that have displayed below-average risk in the past and have managers who are value-oriented to one degree or another. Tweedy Browne Global Value, described in the previous section, is as pure a value-hunting fund as there is.

Yacktman fund puts a somewhat different spin on the bargain-basement approach to stock picking. Donald Yacktman, who managed Selected American Shares from 1983 to 1992, prefers to invest in large, growing companies when they become available at favorable prices. in the past year, as the prices of many of the largest stocks have hit the roof, Yacktman has found investments among midsize and foreign companies. The fund's biggest holding, at 14% of assets, is tobacco-and-food giant Philip Morris. Yacktman's credo: "If you buy stocks at huge discounts to value, it doesn't matter what the market does." This is his fund's fourth appearance in "Best Funds."

Charles Royce, of Royce Premier, has been accused in recent years of subpar performance from his family of funds. But Royce, who specializes in stocks of small, undervalued companies, sees things differently: "Our risk profile will always be low. Most times, that approach pays off. But in very-high-return scenarios of the sort we've experienced in recent years, it does not. That's life." Royce, whose Premier fund has been included in this feature since 1994, believes the stock market will be far less generous in future Years and that his style of trying to buy stocks for 50% to 75% of a company's private-market value will shine. Premier has lost less than the overall market in each brief stock-price downdraft the past few years.

Because Babson Value goes after large companies that are cheap on the basis of earnings, book value and other measures, it seldom holds the highfliers that generally take the biggest hits in a bear market. Manager Roland "Nick" Whitridge also doesn't trade much, sometimes turning over as little as 6% of the portfolio in a year. In fact, over the past year he's sold only two stocks out of the roughly 40 he normally holds.

Nearly half of this investment portfolio's assets are in Harbor Bond, an intermediate-term fund run by William Gross and his team at Pacific Investment Management Co. (PIMCO). Its presence is designed to temper the portfolio's overall volatility and to provide diversification.

Gross and his partners decide how sensitive the fund should be to changes in interest rates on the basis of longterm and short-term economic forecasts. Recently, the fund's interest-rate sensitivity was about 20% greater than that of its benchmark, the Lehman Brothers Aggregate Bond index, which would allow the fund to benefit from further declines in interest rates.

Brent Harris, chairman of the PIMCO funds, says the firm sees interest rates on long-term Treasury bonds, recently at 5.7%, falling to between 5% and 5.5% over the next three years. Harbor Bond recently sported a yield of 5.6%.

Investing for a new home

Funds and allocation

Babson Value 10% Harbor Bond 45 Royce Premier

15 Tweedy Browne Global Value 15 Yacktman

15

Asset Allocation: Nearly a 50-50 split between stock and bond funds.

Designed for: Investors with an intermediate-term horizon, perhaps people saving to buy a home in four to seven years.

Minimum to replicate: $16,667 (3,333 in IRAs)

How to get started: In a regular account, start with Babson, then add (in order) Harbor, Royce, Tweedy Browne and Yacktman. If using an automatic-purchase plan, start with Babson, whose minimum for such plans is $50; the automatic-purchase minimum for Harbor, Royce and Yacktman is $500 and for Tweedy Browne, $2,500. The IRA minimum is $500 for all the funds except Babson, whose minimum is $250. tees at mutua