Just as Business Week was publishing the annual Mutual Fund Scoreboard with its ratings of performance, BW Online presented this conference with Louis P. Stanasolovich of Legend Financial Advisers in Pittsburgh, with advice on fine-tuning a portfolio for the best mix. You can see a sample of his advice in the Feb. 3 issue. He was online with the magazine's mutual-fund guru, Jeffrey M. Laderman, author of the annual BW Guide to Mutual Funds.
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OnlineHost: Welcome to Business Week Online! BW's annual ratings of mutual funds are just out, and here to help you build the best possible fund portfolio is Louis P. Stanasolovich (LStanaslov) of Legend Financial Advisors. Also with us is Jeffrey M. Laderman (JeffBW), BW senior writer who presides over the Mutual Fund Scoreboard and is the author of BW's fund guide. Jack Dierdorff (JackBW) is moderator.
JackBW: Good evening to everyone here on AOL. Welcome, Lou Stanasolovich. Thanks for being with us tonight to share your expertise on mutual funds and the best possible mix.
LStanaslov: Hi, everyone. Hi, Jack and Jeff. Nice to be here.
JeffBW: Hi, Jack. Hi, Lou.
JackBW: Hi, Jeff. Jeff, as the BW mutual-fund guru, will you ask Lou the first question? Then we'll go to the audience.
JeffBW: Sure. Lou, what traits do you look for in the funds you select for clients?
LStanaslov: Consistency of the individual manager. That is of paramount importance. We really don't care much about fund families or a fund itself. What we're concerned about is the portfolio manager, consistent track records over time, in good markets and in bad, and we look for a manager to continue managing a fund as they have in the past -- i.e., the same types of stocks and criteria.
JackBW: BilStanley sent us this question in advance from his AOL keyboard, and it follows nicely.
Question: If a sizable majority of professional managers can't beat the S&P 500 over, say, 10 years, why shouldn't the average investor simply put his/her money into a low-cost market index fund?
LStanaslov: Well, certainly, low-cost index funds are very good as long as they're focused on large-cap stocks, such as the S&P 500. Other types of indexes, such as small-stock indexes, haven't performed as well as individual fund managers. If we went back to the '70s, where the S&P 500 index was performing poorly -- up about 5.5% for the entire decade -- many fund managers who focused on large stocks outperformed that particular index. Therefore, I suspect that when markets are good, indexes will perform better than fund managers, but when markets are bad, managers will outperform indexes.
For an individual who has no expertise in selecting and evaluating a portfolio manager -- for them to pick the top 10% of managers will be very difficult. So the do-it-yourselfer would be wise to use index funds if they don't know how to evaluate fund managers.
JackBW: Phuz in New Jersey has a widely shared investment goal.
Question: I'm looking for a long-term mutual fund for my infant daughter's college fund. What would you recommend, and how should I set it up?
LStanaslov: Tough question. I would suggest Berger Small Company Growth Fund as a long-term performer. It focuses mostly on small and midsize stocks on a growth basis. The manager has an outstanding record as well as at his previous fund, Invesco Dynamics.
JeffBW: Our Mutual Fund Scoreboard is a good place to look. For a college fund, you should look for good small- and mid-cap growth funds. They'll give you the most bang for the buck.
JackBW: JPL 4 37 in Charlotte, N.C., has the next question.
Question: My pension IRA will be rolling over soon. What advice would you give to reinvest for a balance of safety and income?
LStanaslov: From a big-picture standpoint, you should have a combo of domestic bond funds, including high-yield funds, such as Northeast Investors; a good all-around fund such as Loomis Sayles Bond Fund; an international bond fund such as PIMco Foreign; domestic stocks, both large and small, value and growth; international equities, with at least one emerging-markets fund. Plus, real estate funds such as Cohen & Steers Realty Shares, Heitman Real Estate Institutional, and/or CGM Realty shares, and perhpas what I would call a defensive fund, such as Robertson Stephens Contrarian or the Merger Fund, and/or a hard-assets type of fund. As an alternative, if you're looking for just one fund to put your money in, an excellent choice would be Sogen International, which has a combination of all the securities I just mentioned and very steady long-term returns.
JeffBW: Lou, in the portfolio example you presented in Business Week, the clients had $544,000 and 24 funds. Do you really need that many funds? Could you achieve the same with one real estate instead of three real estate funds? Is there a rule of thumb for the dollars and number of funds you need?
LStanaslov: You can cut down on the number of funds such as real estate funds, as you mentioned, but I would reduce it only to two -- Cohen & Steers or Heitman. But I would also include CGM, which focuses on smaller niches in the REIT markets. Rule of thumb: For amounts less than $300,000, I would limit the number of funds to 15 or less. Twenty-four funds is about the most I've ever used. The reason I used so many was because of the large number of individualized accounts, such as husband-and-wife IRAs, another IRA, a pension account, etc.
JackBW: CapCorn640 is California is the next questioner.
Question: We are heavily invested in technologies. Do you think that is going to be a good sector to be in this year?
LStanaslov: Technology over the LONG RUN should be a good niche to be in (long run equals five or more years). However, any one year can be extremely volatile. The market often operates independently of company results. So though technology companies may have a good year this year, it doesn't mean their stocks will. My advice: Invest for the long term -- not the short term -- i.e., a minimum of a three-year period. A sector such as technology stocks should be a supplement to a well-balanced portfolio.
JeffBW: Lou, I didn't notice any Fidelity funds among your choices. What do you think of Fidelity?
LStanaslov: I believe that the portfolio manager is the single most important characteristic in mutual-fund selection. Fidelity is an organization that embraces the fund concept, as opposed to the individual manager. As a result, up until 1996 they had a large turnover among portfolio managers as compared with most other organizations. Since the beginning of '96, 19 portfolio managers have left Fidelity, and more than two-thirds of its 250-plus funds have changed managers. This does not bode well for selecting a fund based on long-term performance. Therefore, we avoid Fidelity.
JackBW: MKHARI (and others, too) has a question that follows right on the last one.
Question: Is [Fidelity] Magellan still a strong fund? Has Vinik leaving affected adversely its performance?
LStanaslov: Magellan going forward will probably at best be plus or minus two percentage points off the S&P 500. Just because of its huge size, it can no longer focus on the small, up-and-coming stocks that made the fund so great, nor can it make large bets into one stock, which significantly enhanced the fund's performance, especially in the early years. Lastly, Peter Lynch is no longer running the fund.
JackBW: Next, this from VOLV85.
Question: How would you handle a bear market in the funds? I have $700,000 now and 13.5 years until retirement.
LStanaslov: I would say that the portfolio in the magazine (BW), give or take some individual choices, would be structured relatively the same no matter what -- it's an all-weather portfolio, for good markets and bad. The portfolio is designed to reduce volatility over time and achieve the client's goals. Of course, this does not answer the question of whether you'll have enough to retire on. That is more dependent upon how much you need to live on.
If you need more assets, a higher weighting toward equities and real estate would be appropriate. On the other hand, if excess funds are available, perhaps a lower weighting toward equities would be justified. However, it is very important to realize that life doesn't end at retirement, and that a proper weighting in equities should be maintained until the end of you and your significant other's life expectancy.
JackBW: What about this one from RockMe831?
Question: I'm 32 and have $10,000 invested in Fidelity mutual funds. My long-term goal is to retire early, but I would also like to enjoy some extra income now. I have an additional $50,000 left in a money market. Do you have any investment suggestions?
LStanaslov: At age 32, the bulk of your funds should be well diversified, primarily among equities, with some of those assets being invested more conservatively in aggressive bond funds, such as domestic high-yield funds and/or a total return fund, like Loomis Sayles Bond, plus a small portion in emerging-market bond funds. Warning: It is extremely dangerous at age 32 to be living off investment income. You'll never achieve your long-term objectives if you do that. Alternatively, you should be saving additional monies and investing them in your portfolio.
JackBW: Next question: From Phraf in New Jersey.
Question: With benchmark yields reaching 7%, what fund or funds would you recommend to an investor whose time frame does not exactly afford the luxury to withstand the market ups and downs?
LStanaslov: Again, I would suggest a well-balanced fund, such as Sogen International. An alternative fund, which is perhaps even more defensive, would be Leuthold Asset Allocation. Steven Leuthold, who runs the fund, is extremely bearish at this time, and carries only 36% of the fund in equities, half of which are REITs [real estate investment trusts].
JackBW: JLennon876 beams this question from Florida.
Question: What are some of the simpler and cheaper tools that I can use in order to research a fund or stock?
LStanaslov: To research a fund, I would suggest Morningstar mutual funds, which is at most libraries.
JackBW: And here on AOL as well.
LStanaslov: You can also subscribe to Morningstar's CD-ROM or to Morningstar Investor. It covers 500 of the top mutual funds and discusses individual funds from time to time.
JeffBW: You can also look to Business Week's Mutual Fund Scoreboard. You can find it here on AOL, as well the Feb. 3, 10, and 17 issues of the magazine. In the spring, we will also publish the seventh edition of Business Week's Guide to Mutual Funds, which is a great resource to keep on your bookshelf.
JackBW: RJL1959 in Massachusetts has this question.
Question: How much of a return can I expect from a moderately aggressive portfolio?
LStanaslov: Going forward, you should not expect the types of returns we've had in the past 15 years. In fact, I just attended a conference where speaker after speaker suggested that the S&P 500 would have either negative returns or just slightly positive returns over the next three years. In fact, the highest return projected was 1.1%. Higher returns, at least for the next three to five years, should be obtained from international equities, especially emerging markets, and small international companies, as well as real estate mutual funds.
People expect slow growth of the S&P because it is overvalued by every historical measure there is. However, relative to interest rates, it is only moderately overvalued at this point in time. Should interest rates move higher, you should expect a downward correction in the market. A 10% to 15% drop this year would not be surprising. A moderately aggressive portfolio over the next three to five years could be expected to return 10% to 12% -- total return. I know these returns don't sound exciting, but given the long-term returns we've received as well as the high valuations among all asset classes, I believe that even this is optimistic.
JackBW: E A Carr asks this one.
Question: I am worried about the market being so high. I would like to invest in no-load mutual funds that I feel are safe in this year's market. Any suggestions? I would like a return of at least 10% -- more if possible.
LStanaslov: A relatively secure type of fund going forward would be a real estate fund for the next one to three years. I say this for a number of reasons: Returns of the REITs that the current real estate funds invest in are 6% to 7%. The expected growth rates of most REITs will be 6% to 9% over the next two years -- per year -- resulting in a total return of 12% to 16%.
In addition, since the beginning of 1993, REITs have shown a low correlation (similarity) to U.S. stocks and bonds in terms of their price movements. For example, in June and July of '96, while the S&P had dropped about 9% and small stocks dropped about 17%, REITs had a positive return of 5%. Again, last December, REITs were up 10% while the S&P 500 was down 3%. Because of their high yields, it is likely that were stocks to fall, REITs would not fall as much -- especially when you look at a 12-month time frame.
JackBW: JoeFC555 asks this next one. He's in Virginia.
Question: My son starts to college in 3 1/2 years. What would you suggest for a short-term portfolio for someone who fears market corrections between now and then?
LStanaslov: CDs [certificates of deposit] are an excellent investment, and should be emphasized. In any equity fund investments you have, the money should be dollar-cost-averaged OUT of the funds. Take out a little every month between now and the time your son graduates from college. That will lessen the volatility of the portfolio. You should place that money in a money market mutual fund or shorter-term CDs.
JackBW: AMcmill10 is next.
Question: What are your views on mutual funds that invest heavily in the Asian markets?
LStanaslov: Long-term, they should prove to be an excellent investment. And I would strongly emphasize that a portion of your portfolio be invested in these markets, either through a regional emerging-market fund, such as Matthews Tiger Pacific, and/or Colonial Newport Tiger, or through a diversified emerging-markets fund. The growth rate of companies in Southeast Asian nations and their high savings rates, high literacy rates, and growing populations are a formula for great success.
JeffBW: Lou, you didn't mention funds investing in Japan. What about that beleaguered market?
LStanaslov: I think Japan will continue to have its troubles over the next few years. However, should the market drop back into the 13,000 range, which was its low a few years ago, I might consider a fund that emphasizes Japanese stocks. However, Japan appears to be in a free-fall currently. And therefore, I would avoid it for now.
JackBW: One final question here, from Kbcamacho in Florida.
Question: What do you recommend for someone who is near retirement (couple of years) with a limited pension plan who needs to have a continued good return (12% to 15%) in order to avoid running out of assets over the next 25 to 35 years of retirement?
LStanaslov: Boy -- 12% to 15% returns are probably beyond reach except for all but the riskiest of portfolios. The only hope you have of meeting that goal would be to invest almost entirely in equities and be ready to take your lumps when the markets fall. A better solution would be to continue working more years, so that you could save additional monies before you retire -- and then consider part-time employment thereafter. I would also start looking for ways to significantly reduce your lifestyle expenditures.
JackBW: Thanks to Lou Stanasolovich of Legend Financial Advisers for his mutual fund savvy. And thanks, too, to Jeff Laderman of BW.
LStanaslov: Thanks, everyone. Apologies to the last questioner -- but I wanted to give an honest answer.
JackBW: Special thanks to the audience for all the questions. I wish we had had time to answer all of them.
LStanaslov: Thanks, Jack and Jeff.
JeffBW: Thanks, Lou. Thanks, Jack.
LStanaslov: I'm in Pittsburgh, if anyone needs me.
JackBW: Transcripts of this and all BW Online conferences are available soon after the event. Look under Talk & Conferences on the BW Online opening screen. Visit BW Online's Mutual Fund Corner, via BW Plus!, also on the opening screen. Thanks again, and goodnight to all! And good luck investing!
Copyright 1997 by The McGraw-Hill Companies, Inc. All rights reserved.
