Midyear Investment Review and Outlook : The Search for Growth : After a rough first half on Wall Street, where are the best profit opportunities in markets now? Here, four mutual fund managers explain their strategies. Interviews by Tom Petruno.

Richard Huson

Fund: Crabbe Huson Asset

Allocation, Portland, Ore.

Category: Flexible

First-half return: -3.3%

Avg. flexible fund return: -4.2%

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Flexible funds were designed for relatively conservative investors who want to own a mix of stocks and bonds, but who also want to leave the specific mix up to a professional.

Unfortunately for most of those professionals, picking among stocks and bonds in the first half of ’94 proved to be a thankless task. Rising interest rates devalued bonds and whacked most stocks.

Richard Huson, manager of the Crabbe Huson Asset Allocation fund, had to settle for a 3.3% loss on his $110-million portfolio in the first half.

Faced with the problem of how to make up for that loss and get back in the black in the second half, Huson has decided to make a stand in the bond market: He’s betting that long-term bond yields are near their peaks and will soon decline.

He has raised the fund’s bond holdings to 40% of the portfolio from 32% earlier in the year, and doubled his bond stake’s average maturity, to 11 years.

He figures the Federal Reserve Board’s steps to tighten credit this year have been enough to guarantee a mild slowdown in the economy. And that pending slowdown, he believes, will allow bond yields to come down enough to make bonds’ second-half total returns “serious competition” for stocks.

With 45% of the portfolio now in stocks and the remaining 15% in cash, Huson says he’s willing to make bonds as much as 45% of the fund if yields go any higher--and then wait for them to fall.

The stock market, on the other hand, may not yet have reached its bottom in this down phase, Huson says, even if long-term interest rates fall from here. After a three-year bull run, “I think the stock market is tired,” Huson says. But the shakeout shouldn’t last into 1995, he adds; by then, he expects stocks to again hold significantly more promise than bonds.

In the meantime, the stocks he has picked for the fund constitute an eclectic mix of what he believes are solid “value” stories and potential turnarounds.

The fund owns long-unloved Occidental Petroleum, for example, as a bet on rising oil prices and increasing demand for its chemicals (like caustic soda) as the world economy gains steam. Stakes in Apple Computer and IBM are wagers that their jointly developed PowerPC computer chip, a potential rival to Intel’s daunting chip franchise, will be an eventual success.

Huson also believes that real estate investment trusts, or REITs, remain an attractive way to invest in revitalized markets for commercial, apartment and industrial property, while also earning high dividend yields. The fund’s REITs include Spieker Properties, which mainly owns industrial properties, and DeBartolo Realty, a nationwide shopping center REIT.