Wrestling with the bear: black fund managers are adjusting their strategies for the long haul. (B.E. Black Fund Watch).
At the end of the second quarter, the Standard & Poor's 500 index lost 13.4% and reached a three-year annual loss of 9%. Meanwhile, equity funds fared slightly better, falling 12% for the second quarter with a three-year annual return of negative 3.6%.
Compounding this, ongoing news reports of accounting scandals at Enron and WorldCom, to name a couple, have added to the public's feelings of uncertainty and mistrust about the stock market.
"The stock market is not trading on fundamentals, but on news flashes and speculation," says Eugene Profit, president and portfolio manager of the Profit Value Fund (PVALX) in Silver Spring, Maryland. "Unfortunately, for us who have a longer-term perspective, this extended reactionary market is causing substantially negative, absolute short-term returns."
Despite this, money managers have concluded that their best defense is to stick with their investing patterns. Eric McKissack, portfolio manager of Ariel Appreciation and vice chairman of Ariel Capital Management in Chicago, whose portfolio was down 6.8% for the second quarter, is realistic about the situation. "At this point, unless you're a bond fund or specialty fund, you're down," he says. However, he noted that there are still some good opportunities to be had.
"We've focused on our mid-cap value area over the long-term and it's proven itself a good place to be," says McKissack. "But we're also going to look at stocks that have gotten more attractive, as well as areas that have heated up dramatically, like telecoms, for example. We think it's appropriate to look at these various opportunities given the amount of loss in those areas."
Mark D. Lay, chairman and chief investment strategist of MDL Capital Management and portfolio manager of the MDL Broad Market Fixed Income Fund (MBMFX) in Pittsburgh, has reason to be optimistic. His fund posted returns of 2.3% for the end of the second quarter and was up 4.5% as of Aug. 6. Unfortunately, the MDL Large-cap Fund (MLGEX) was liquidated on March 28, 2002, solidifying MDL's focus on fixed-income securities over equities.
Lay believes the fallout in the market has shown investors the importance of having bonds in their portfolios. "It's important for investors to stay in the market by allocating money to purchase stocks and bonds," he says. With the market down, Lay says investors can score some bargain stocks to improve their portfolios, but he cautions: "Investors in their latter years should keep a very conservative portfolio as they are closer to retirement."
Lay says his fund's ongoing strategy will be to buy short-term bonds. He anticipates that corporate economic data will strengthen soon, which could fuel inflation fears and higher interest rates in 2003. When long-term interest rates rise, the prices of bonds fall. "By having a policy of buying short-term bonds, the interest rate movements aren't as significant, and it's a great way of preserving capital," says Lay. "You won't make as much money, but you won't lose as much either."
The Kenwood Growth & Income Fund (KNWDX), co-managed by Barbara Bowles, hasn't had a great year. At the end of the second quarter, the fund had fallen 1.8%, and had a year-to-date return of -11.76%.
Bowles, chairman and CEO of The Kenwood Group Inc. in Chicago, says that she is prepared to sell stocks that don't reach her fund's measure of fair value, and says she is spending more time getting to know the corporate managers of the companies her fund invests in. She is also reading Securities and Exchange Commission statements more closely to determine whether underperforming stocks are trading on fundamentals or emotions.
B.E. Black Mutual Funds Index 1-Year Ann. 3-Year Ann. Fund Name (Ticker) Total Return * Total Return * Ariel (ARGFX) 2.51 8.86 Ariel Appreciation (CAAPX) -3.95 4.95 Ariel Premier Bond Inv (ABPRX) 7.05 7.77 Brown Cap Bal Instl (BCEIX) -21.61 -8.64 Brown Cap Equity Instl (BCSIX) -28.53 -12.54 Brown Cap Sm Co Instl (DEMNX) -30.56 2.23 DEM Equity Institutional (DEMEX) -32.46 -5.30 DEM Equity Investor (LOMAX) -32.94 -6.02 Edgar Lomax Value (KNWDX) -13.6 -3.57 Kenwood Growth & Inc (KNWDX) -14.61 -3.29 Lou Holland Growth (LHGFX) -17.15 -6.65 MDL Broad Market F/I (MBMFX) 6.62 8.11 Profit Value (PVALX) -25.53 -7.35 5-Year Ann. Toll-Free Fund Name (Ticker) Total Return * Number Ariel (ARGFX) 10.71 800-292-7435 Ariel Appreciation (CAAPX) 11.15 800-292-7435 Ariel Premier Bond Inv (ABPRX) 6.5 880-292-7435 Brown Cap Bal Instl (BCEIX) -0.8 800-525-3863 Brown Cap Equity Instl (BCSIX) -2.66 800-525-3863 Brown Cap Sm Co Instl (DEMNX) 7.15 800-525-3863 DEM Equity Institutional (DEMEX) N/A 800-752-1013 DEM Equity Investor (LOMAX) N/A 800-752-1013 Edgar Lomax Value (KNWDX) N/A 800-576-8229 Kenwood Growth & Inc (KNWDX) 1.13 888-536-3863 Lou Holland Growth (LHGFX) 2.61 800-295-9779 MDL Broad Market F/I (MBMFX) N/A 877-635-3863 Profit Value (PVALX) 2.69 888-744-2337 Minimum Fund Name (Ticker) Initial Investment Ariel (ARGFX) $1,000 Ariel Appreciation (CAAPX) 1,000 Ariel Premier Bond Inv (ABPRX) 1,000 Brown Cap Bal Instl (BCEIX) 10,000 Brown Cap Equity Instl (BCSIX) 10,000 Brown Cap Sm Co Instl (DEMNX) 10,000 DEM Equity Institutional (DEMEX) 25,000 DEM Equity Investor (LOMAX) 25 Edgar Lomax Value (KNWDX) 2,500 Kenwood Growth & Inc (KNWDX) 2,000 Lou Holland Growth (LHGFX) 100 MDL Broad Market F/I (MBMFX) 500 Profit Value (PVALX) 2,500 * AS OF JULY 31, 2002 SOURCE: MORNINGSTAR INC.
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|Date:||Oct 1, 2002|
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