MUTUAL FUNDS: ASSET ALLOCATION
In a choppy market that's divided by interest rates moving up and Old and New Economy thinking, plain old asset allocation funds might not be so humdrum after all.
No doubt about it, it's hard to top the cocktail circuit chatter where investors young and old are talking about the bundle they've made on their tech stocks. But to most mutual fund investors----whose long-term investing goals throughout the years have consistently been saving for retirement---- making a killing in tech stocks on paper today isn't nearly as important as having a nest egg come retirement time. And that's where asset allocation funds can come in.
Asset allocation funds, in the broadest sense, are mutual funds that invest their assets among the three different asset classes---stocks, bonds and cash. Depending upon the fund and the way the assets are divvied up, they can be classified as either balanced or flexible funds in the Lipper Inc. universe or small-, medium, or large-blend funds in Morningstar's.
The nifty thing about these funds is that while basically considered conservative investments, conservative doesn't necessarily mean boring. Take the Value Line Asset Allocation Fund, for instance. It's a fund that's been around since 1993, has an average annual total return of about 22 percent, and a good portion of its stock picks are currently in oh-so-trendy technology arena. The debt portion of the fund is typically invested in Treasuries and U.S Agency bonds.
But before going there, the first thing investors need to know about any of the Value Line's equity funds is that Value Line isn't a value shop. Far from it. All 16 equity funds from this family are growth funds as portfolio managers there primarily invest in growth stocks--- not value ones. The "value" in Value Line stems from the company's founder, Arnold Bernhardt, and represents a trend line showing the direction of a company's price over time.
"Mr. Bernhardt came up with a stock selection tool and he would draw--- on a stock chart--- what he called the value line," explains Stephen Grant, lead portfolio manager on the Value Line Asset Allocation Fund, (800-223-0818) "It showed the average value of the company and he would project it out and show what the value should be a couple of years ahead."
Currently, there are about 200 stocks in the Asset Allocation Fund. The median capitalization of the companies in the portfolio is about $4.8 billion with 15 percent of the holdings in small cap companies ( those with capitalizations under $1.5 billion); 35 percent in mid-cap companies ( $5 billion and under); and the remainder is in large-caps.
The kinds of names in the portfolio will include everything from the familiar, like Cisco Systems and Wal-Mart, to the not so familiar like Metro Media Fiber Network. Equity assets are spread among the current growth areas of the market and include computer software and services; retail-specialty lines; drug; telecom equipment; and semiconductor companies. And, while the stocks in the fund are hand-picked the percentage of assets allocated to them are not.
"We have a proprietary model that tells us how much to invest in each category," says Grant.
Right now the fund has 60 percent of its assets invested in stocks, 30 percent in bonds and 10 percent in cash. But that's not always been the case. At the end of last year, for instance, only 37 percent of assets were invested in stocks. And at one point in 1998, 90 percent was in equities.
Grant is pretty close mouthed about the screens he and his team use for stock selection but the kinds of companies he seeks are those whose prices are "going up at a nice clip" and making new highs. He'll also buy companies that don't have earnings. "If they don't have earnings, there is always sales to look at," he says.
While the fund balances out its growth stock investments by investing in high quality bonds and cash, the fund holds appeal to investors who want to in both sides of the market---those wanting a blend of conservative bonds and moving growth companies of all sizes. On the other hand, if it's a fixed portfolio you're in need of, this one isn't for you. Also, when the market turns and value stocks have their day, this fund's performance could suffer.
But the Value Line Asset Allocation Fund is just one example of how what's typically considered a stogie conservative investment really isn't once you look at what's in its portfolio. There are, however, dozens of other asset allocation/blend/flexible portfolios that allow shareholders to take advantage of both sides of the market---rising interest rates and stock prices. Check them out. You might be pleasantly surprised.
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