Dian's Column
Dian's Archive



It's the holidays and one thing is certain, this year the markets have left many in a holi-daze. But not to worry, another year is right around the corner and who knows what it might bring.

Part of the deal of being a long-term fund investor is riding through both good and bad markets. And as each year comes to a close, the year-end performance tallies on their funds can either make us smile or wish we had more invested in those seemingly boring money market funds.

But no matter how one financial year turns out, there's always the future. To shed some light on what it might bring, here are thoughts from a few fund portfolio managers.

  • Small-cap funds. Mark Seferovich and Grant Sarris, are both senior vice presidents and portfolio managers on three of Waddell & Reed's funds; the Target Small Cap Fund, the Advisors Small Cap Fund, and the Small Cap Growth Fund.

    "We are on the growth side of small-caps as opposed to the value side, " says Seferovich. " And that's been especially difficult this past year."

    According to Seferovich, most of this year's performance damage came from the momentum stocks, i.e.., the very speculative or concept companies, that were held in each fund. But, he points out, with 15 to 20 percent siting in cash in each fund, and the hope that the Fed will cut interest rates soon, he and Sarris don't see a gloomy future for small-cap growth stocks. Instead, they are in the process of looking for new companies to invest the fund's assets in. Those of particular interest are the stocks of companies that got caught up in the down draft of the markets like the "guilt by association stocks" ones that have established liquidity and earnings records.

    "We've gotten to the point where you're no longer paying a huge premium to buy some of these high growth smaller companies," says Sarris. "So, it's time to start looking through the rubble to pick out the best ones.

    While both managers think that market will still favor value stocks in the near future, they feel the small cap growth stocks that they purchase at these lower prices could be the big winners two and three years down the road.

  • Bond funds. Bill Stevens is portfolio manager of Montgomery's Total Bond Return Fund. It's a fund that invests in investment grade bonds, that is those rated triple B rated and above and has had a great double-digit total return for the year; up over 11 percent through December 18.

    Stevens says the fund is currently underweighted in Treasury bonds because he thinks the Treasury market is due for a correction; thinks corporate bonds are cheap right now, hence the fund is overweighted in them; and, with the possibility of higher bond default rates ahead, is very picky about bond credit ratings when he's out shopping for new portfolio holdings.

    Concerned that the Fed will move too slowly and that we are in an economic turndown that may get worse, Stevens reminds investors that bond funds can play the role of a "diversifier" in one's portfolio. "Because there is less volatility in your bond holdings that in your stock holdings, if stock prices are too volatile for you, they (bond funds) are a place to hide out."

    Whether you are invested in money market funds, short or intermediate turn bond funds, Stevens says, " In a world where equity prices are going down 10 percent a year, having a positive return is a good thing."

  • Large cap value and growth stocks. Elaine Garzarelli, portfolio manager of the Forward Garzarelli Equity Fund, looks at both value and growth stocks when she's out shopping. And, unlike many portfolio managers today, isn't sitting with a lot of cash to invest in this market. She's says the fund is fully invested. Why? "In a bear market like we've been in, we have gone to defensive industries so we didn't need to go into cash."

    Garzarelli, who became a recognized market pundit in 1987 when she called the market crash that year, thinks that the markets in 2001 will bring more rising stocks than falling ones. " More sectors corrected in 1999, and this year we had the correction in the techs and bio techs and so next year it (the market) should be very broad based."

    She even expects the S & P to be up substantially next year." Now a lot of this is in anticipation of the Fed easing and 2002 earnings coming back," she said.

    The common thread in each of the scenarios is the Federal Reserve, and, the hopes that they'll lower interest rates in the near future. But there is more to the market than interest rates. Investor sentiment plays an important part, too. So as 2000 comes to a close, why not take some clues from how the pros manage their money and a), always make sure you've got some cash in money market funds available for either rainy day expenses or investment opportunities; b), re-evaluate your fund holdings making sure its make-up meets your needs; and c), sit back and enjoy next year's market's ride remembering all the while that a fund's past performance is no indication of how it will perform in the future.

    To read more articles, please visit the column archive.

  • [ top ]