Bottom Line Inc

A Portfolio for Brighter Times: Moves to Make as the Economy Looks Up

0
When the markets were collapsing a year ago and I appeared in these pages, I advised extra caution, telling readers to reduce stock allocations in their portfolios and to focus on funds that could be resilient in downturns. That move helped to protect assets.

Since then, the economic outlook has improved. Sales of cars and houses are rising. Many economists now say that the gross domestic product will grow modestly in the fourth quarter of 2009 and throughout 2010. That should boost corporate profits and enable the stock market to rise slightly. I expect the Standard & Poor’s 500 stock index to reach 1,100 by the end of 2010, up from the current level of around 1,000. To profit from better times, I am beginning to take a slightly more aggressive stance, increasing allocations to stocks and reducing cash holdings.

PORTFOLIO PROTECTION

When designing portfolios, my aim is to protect investors. When markets seem troubled, I take defensive positions, emphasizing fixed-income investments. As the outlook improves, I take on more risk. Under current circumstances, my portfolios remain fairly cautious, with most of the assets in bond funds and hybrid funds that hold a mix of stocks and bonds. The goal is to enable clients to achieve 80% of any stock market gains—while suffering only 30% of the losses that occur in stock market downturns.

Avoiding big losses is particularly important now because the economy still faces serious problems. Home foreclosures continue to mount, and employers remain reluctant to hire. Because of the problems, the market still faces periodic drastic losses.

Right now in my portfolio for investors over age 50 with moderate or low risk tolerance, I’m reducing cash holdings to 5% of assets, down from 15% a year ago… raising stock funds to 25%, up from 15%…and continuing to hold 50% in hybrid funds and 20% in bond funds. Portfolio details…

HYBRID FUNDS: 50%

For the hybrid allocation, I stick with proven managers who have the ability to shift among stocks, bonds and cash. My favorite flexible hybrid funds have long track records for limiting losses in downturns and delivering solid results in better times.

Although my allocation to hybrids remains unchanged from a year ago, I am shifting to more aggressive funds in the category. I am eliminating First Eagle Global Fund (SGENX) and Permanent Portfolio Fund (PRPFX). These cautious funds hold diversified portfolios that include fixed income and gold. That mix has protected shareholders, but now the funds seem too cautious for a time when stocks should rise. I am also eliminating Pimco All Asset Fund (PASAX) and Vanguard Wellesley Income Fund (VWINX). These fine funds keep most of their assets in fixed-income investments.

Hybrid funds suitable for brighter times include…

  •  Berwyn Income Fund (BERIX). Allocation: 10% of assets. This conservative fund can put up to 30% of assets in stocks and the rest in fixed income, including high-yield bonds rated below investment grade. Some conservative funds avoid high-yield bonds because they can be risky, but bonds can produce solid results. Stock holdings include steady dividend-payers that can withstand difficult times. Performance: 6.3%.* No load. 800-992-6757, www.berwynfunds.com.
  •  BlackRock Global Allocation Fund (MDLOX). Allocation: 10% of assets. This fund invests in stocks and bonds worldwide. The fund has about one-third of assets in fixed income and most of the rest in dividend-paying blue chips. Performance: 8.5%. Maximum front-end load: 5.3%. 800-441-7762, www.blackrock.com.
  •  FPA Crescent Fund (FPACX). Allocation: 10% of assets. This moderately aggressive fund owns stocks of companies of all sizes as well as fixed income. The fund currently has 35% of assets in cash—which can be deployed as bargains appear. Performance: 6%. No load. 800-638-3060, www.fpafunds.com.
  •  Ivy Asset Strategy Fund (WASAX). Allocation: 10% of assets. This world fund became cautious last year, reducing stock holdings. The fund has been taking on more risk lately, though it still holds 45% of assets in cash. Performance: 14.5%. Maximum front-end load: 5.8%. 800-777-6472, www.ivyfunds.com.
  •  Vanguard Wellington Fund (VWELX). Allocation: 10% of assets. This moderately aggressive fund has 60% of assets in stocks and the rest in fixed income. Holdings include undervalued companies with solid balance sheets. Performance: 5%. No load. 800-662-6273, www.vanguard.com.

BOND FUNDS: 20%

I continue to hold bond funds that have proven their ability to thrive in difficult markets.

  • FPA New Income Fund (FPNIX). Allocation: 10% of assets. This intermediate-term bond fund is a conservative choice managed to preserve capital during the worst of downturns. The fund remains cautiously positioned, with 23% of assets in cash. Performance: 3.9%. Maximum front-end load: 3.5%.
  • Harbor Bond Fund (HABDX). Allocation: 10% of assets. This intermediate-term bond fund has long outpaced its benchmarks. Star portfolio manager Bill Gross has a knack for spotting undervalued assets and shifting holdings at the right time. Performance: 6.2%. No load. 800-422-1050, www.harborfunds.com.

STOCK FUNDS: 25%

Besides increasing exposure to stock funds in the portfolio, I am also introducing a small-cap fund. The stocks of small companies can be risky, but as the economy improves, they should thrive.

  • Fairholme Fund (FAIRX). Allocation: 10% of assets. This fund is in the “large-cap blend” category, holding a mixture of growth and value stocks. It specializes in unloved companies that generate lots of cash. The fund holds cash when it can’t find bargains. Performance: 8.7%. No load. 866-202-2263, www.fairholmefunds.com.
  • Hussman Strategic Growth Fund (HSGFX). Allocation: 10% of assets. This fund holds stocks of companies of all sizes that stand to benefit from trends in the economy, such as low-priced retailers and restaurants that do relatively well as consumers tighten their belts during hard times. When prospects sour, manager John Hussman can sell short, betting that stocks will fall. Performance: 3%. No load. 800-487-7626, www.hussmanfunds.com.
  • Intrepid Small Cap Fund (ICMAX). Allocation: 5% of assets. This small-cap value fund holds small companies that have undervalued shares. It favors companies with steady revenues. When markets froze in 2008, the fund had 27% of assets in cash. Performance from inception October 3, 2005, through August 31, 2009: 11.4%. No load. 866-996-3863, www.intrepidcapitalfunds.com.

CASH: 5%

Cash investments are currently paying puny yields, but by stashing some assets in a money-market fund, you can protect their value while waiting for the economy to improve. My favorite: Vanguard Prime Money Market Fund (VMMXX).

*Performance figures are the funds’ five-year annualized returns as of August 31, according to Morningstar, Inc., unless otherwise indicated.

print
Source:
Source: Vern Hayden, CFP, president of Hayden Wealth Management Group, a financial planning and investment advisory firm in Westport, Connecticut, www.haydenfinancial.com. Dubbed “Mr. Mutual Fund” by CNBC, he is author of Getting an Investment Game Plan (Wiley).
Date: October 1, 2009 Publication: Bottom Line Personal
Keep Scrolling for related content View Comments