Asset-Allocation Funds Offer Investors Leeway : Your Money
Getting ready to fine-tune your portfolio for 1994? Then you might want to consider how asset-allocation mutual funds are positioning themselves for the year ahead.
As a group, these vehicles have more leeway than other mutual funds to move among different asset classes.
All asset-allocation managers can juggle their holdings of U.S. stocks, bonds and cash (money-market securities) to capture what they consider the best opportunities. Some also have latitude to move into more exotic areas, such as foreign investments and gold.
The following are summary outlooks from managers of five leading asset-allocation portfolios that enjoy above-average or superior performance ratings from Morningstar Inc. of Chicago.
* SoGen International. This conservative fund has perhaps the most defensive posture of the five portfolios, heading into the new year.
Manager Jean-Marie Eveillard has 30% of assets in cash, 11% in bonds and 8% in gold-related shares, which he considers reasonably low risk, in light of how little gold prices have moved in the last several years.
Stocks account for only half the portfolio, and U.S. stocks are only two-fifths of that. What worries Eveillard is the shortage of underpriced stocks around the world, especially in the United States. Bourses in Europe may offer the best bets for bargain hunters, he says.
The fund’s low position in bonds reflects Eveillard’s feeling that the lengthy decline in interest rates is mostly over, both in this country and elsewhere.
* Strong Investment. This fund has an even lower weighting in stocks, which account for just 35% of the portfolio. Bonds also weigh in at 35%, and the rest is in cash and very short-term bonds.
Jay Mueller, a co-manager of the fund, predicts the United States economy will be stronger than expected in 1994, which will require the Federal Reserve to push up short-term interest rates a bit, to stave off inflation. Although Mueller would endorse such a move, he concedes it wouldn’t be good for stocks or bonds in the near term.
Otherwise, Mueller says, the stock market has favorable factors working for it, such as low inflation, improving corporate profits, corporate restructurings and an anticipated rise in demand for equities from baby boomers who are starting to plan for retirement.
He adds that the fund’s 35% stock weighting isn’t especially bearish, considering that it is usually 40% stocks, 40% bonds and 20% cash.
* Fidelity Asset Manager. A year ago, this fund’s manager, Robert Beckwitt, accurately predicted that the best stock-investing opportunities would lie outside America’s borders. Now, after a year of strong gains for foreign bourses, he believes the United States will have one of the better-performing markets in 1994.
A strengthening U.S. economy is contributing to improved corporate earnings, Beckwitt says. Besides, the sparkling gains in foreign markets, coupled with a flood of dollars pouring into international funds, suggests that this sector is due for a rest.
For the fixed-income portion of Fidelity Asset Manager’s portfolio, Beckwitt prefers foreign bonds over domestic ones. He considers European bonds especially favorable because interest rates can fall much further in those countries than here.
“Expectations (among American investors) are high, generally, and ridiculously high for U.S. bond investments,” he says.
Heading into 1994, Beckwitt has 30% of the fund’s assets in U.S. stocks and 15% in foreign equities, but 26% in foreign bonds and only 16% in domestic bonds (mostly low-rated ones). Fidelity Asset Manager’s cash component, at 13%, includes a significant stake in Mexican commercial paper.
Beckwitt views the fund’s overall 45% stock weighting as mildly bullish. The usual allocation is 40% for both stocks and bonds, and 20% for cash.
* Oppenheimer Asset Allocation. This fund currently has a decidedly neutral stance--at least by its own standards. The current breakdown is 55% in stocks, 42% in bonds and the rest in cash, almost exactly what the normal mix would be.
“Unless you’re particularly pessimistic, I would normally suggest being over-weighted in equities, since equities, over the long term, have earned higher returns than the other asset classes,” says Richard Rubinstein, the portfolio manager.
On the plus side for the stock market, he cites low interest rates, strong potential demand for stocks from disgruntled bank customers and a likely increase in purchases by corporate retirement plans that will have to go heavier into the market to meet their actuarial projections.
He also sees a possibility of surprisingly good earnings next year for corporations embarked on cost-cutting restructurings.
On the downside, measures of value such as price-to-earnings ratios, cash flow and dividend yield all show that the market is overpriced, he says.
Rubinstein is bullish on foreign stocks, which he thinks will continue to benefit from declining interest rates. He’s a bit glum on foreign bonds, which he thinks will face further pressure from a strong dollar.
* Vanguard Asset Allocation. Of the five funds, this one has the highest equity weighting at 70% (all in large U.S. stocks), with 30% in long-term Treasury bonds and nothing in cash. Those are the only three asset categories management considers.
The portfolio follows a contrarian approach, but with a twist: The stock and bond markets aren’t evaluated in relation to their historic price levels, only against each other and cash, says Thomas Loeb, the co-manager.
This explains why the fund can have a pretty steep 70% in stocks at a time when the market is considered high, if not overpriced, by most measures.
Loeb said he expects the stock market to produce an 11% return over 1994, which he says compares favorably to both bonds and cash, even when the higher risks associated with equities are factored in.
In short, Loeb said: “We feel bonds are fairly valued, stocks are a little undervalued and cash isn’t even in the picture.”
*
Prudential Securities says its annuity customers have made a radical change in their portfolios over the last three years.
In 1990, 85% of the annuity assets held by Prudential clients were allocated to fixed-income accounts, with 15% in variable accounts, mostly equity portfolios. Today, the percentages are exactly reversed.
Declining fixed-income yields and a growing appreciation of stock portfolios, especially among younger investors, are reasons behind the shift.
Where They Stand
Here’s key information on the five leading asset-allocation mutual funds profiled in the accompanying article. All five enjoy superior risk-adjusted performance ratings from Morningstar Inc.
Max. Sales Phone 1994 Fund Charge (800) Outlook SoGen 3.75% 334-2143 Cautious about global stock, bond International markets. Optimistic about gold. Strong None 368-1030 Cautious about stocks, bonds Investment over short term. Fidelity Asset None 544-8888 Optimistic about U.S. stocks, Manager foreign bonds, U.S. junk bonds. Cautious about other domestic bonds. Oppenheimer Asset 5.75% 525-7048 Neutral on stocks, bonds, Allocation Cash. Long-term bias favors stocks. Vanguard Asset None 662-7447 Optimistic about U.S. Allocation stocks, neutral on bonds, underweighted in cash.
Source: Morningstar
