(The author is a Reuters contributor. The opinions expressed
are his own.)
By Lewis Braham
PITTSBURGH, March 21 Freedom for money managers
is a double-edged sword. Nothing highlights an active manager's
skill, or lack thereof, like flexibility. If you can buy any
stock or bond, your opportunities to soar above your peers or
crash and burn increase dramatically.
The Lipper 2014 U.S. Fund Awards for the "mixed-asset" and
"flexible portfolio" categories highlight the abilities of the
best go-anywhere managers. They must not only outperform on
returns but also assume the same or less risk than their peers.
Lipper is a unit of Thomson Reuters Corp .
Since the funds are so flexible, figuring out where they
belong in your portfolio can be tricky. Are they bond
substitutes, equity substitutes, or a little bit of both? It's
hard to say, because strategies vary tremendously.
At Villere Balanced, a winner in the Mixed-Asset
Target Allocation Growth category, co-managers George Young and
Lamar Villere employ a bottom-up, kick-the-tires approach,
seeking stocks and bonds of undiscovered, often small,
Meanwhile, Kandarp Acharya, co-manager of Wells Fargo
Advantage Index Asset Allocation and winner in the Mixed-Asset
Target Allocation Moderate category, uses a more top-down, macro
approach to determine how to allocate to indexes of large-cap
stocks and Treasury bonds.
The Wells Fargo fund is up an annualized 17.7 percent during
the past five years through March 19, besting 97 percent of its
peers. Villere Balanced is up an annualized 22.7 percent for the
same period, outperforming 99 percent of its peers.
WORKING WITHIN LIMITS
Most flexible fund managers have some allocation
restrictions, but usually have a lot of leeway within the
limits. The Villere fund, for instance, can hold anywhere
between 25 percent and 40 percent in bonds. Right now, it has 27
"We're fairly negative on bonds with interest rates so low,"
The fund is also fairly concentrated, holding only 25
stocks. Young of Villere likes companies unknown to most
investors, like LKQ Corp, which has a 70 percent market
share in the refurbished auto parts market. LKQ Corp has many of
the features he seeks in a stock: a dominant position in its
industry, strong cash flow and manageable debt levels.
By contrast, Wells Fargo's Acharya says markets are
reasonably efficient, so indexing makes sense, given the
difficulty most managers have beating their benchmarks. Actively
managing the allocation to various assets can add value, he
The academic research bears him out. According to studies,
some 40 percent of portfolio performance at the average fund was
due not to individual stock picking but to how much was in
stocks or bonds.
Acharya determines his allocations in part through a
quantitative model that compares the relative prices of stocks
to bonds. If price-earnings ratios of stocks are reasonable
while bond yields are skimpy, as they are now, the fund tilts
But models can be misleading if you rely solely on them. So
once a month, Acharya convenes an eight-member investment
committee that includes the firm's top investment team, such as
Jim Paulsen, the chief investment strategist.
Most of the other Lipper winners with flexible styles
resemble Villere's bottom-up approach, but with important
differences. Take John Nichol, lead manager of the Federated
Capital Income Fund, winner in the Mixed-Asset Target
Allocation Conservative category. While he can buy virtually any
asset, Nichol's fund must always be at least 50 percent in bonds
but can go as high as 75 percent in that asset class. He has
delivered a 7.4 percent annualized return over the past decade,
besting 97 percent of his peers.
Right now, Nichol has almost one-half of his portfolio in
high-yield and emerging-market bonds, which are paying the best
yields and are the least sensitive to interest-rate increases.
Instead of picking individual securities in those sectors, he
invests in other funds run by Federated bond managers and
focuses on stocks with his own analyst team.
Most equity-income investors tend to go heavily in utility
stocks with high dividends. Nichol is flexible there, too. He
will often switch between a high-dividend strategy and a
dividend-growth view, buying stocks with dividends that may be
low but increasing.
BEHAVING LIKE BONDS
In a rising interest-rate environment, high-dividend stocks
usually fall as they behave like bonds. Last May and June, when
rates jumped by more than one percentage point, Nichol was
underweight in utilities as he saw them as overvalued and was
overweight in dividend-growth pharmaceutical and technology
stocks. This minimized losses and enabled the fund to beat more
than 90 percent of its peers in 2013.
Now that high dividend payers have fallen some, Nichol is
easing back into the sector. The fund has 21 percent in energy
stocks like Royal Dutch Shell and ConocoPhillips
, which have yields in excess of 4 percent.
While Federated Capital Income has an income tilt, Columbia
Marsico Flexible Capital slants toward equities,
requiring it be at least 60 percent in stocks. As the winner in
the global flexible portfolio category, it has 94 percent of
assets in stocks, but bonds have been as high as the teens, when
yields were in the double-digits in 2009.
Although stocks dominate now, part of the strategy of
Flexible Capital, according to co-manager Munish Malhotra, is to
examine the entire capital structure of a company to find the
best value. A holding like AutoZone Inc, which sells
replacement vehicle parts, pays only 3 percent to 4 percent
yields on its bonds, but is using the debt to buy back stock at
a significant rate. The buybacks equate to an 8 percent
dividend yield in Malhotra's calculations so he feels the stock
is the better deal than the low paying bonds.
Figuring out where these eclectic funds belong in your
portfolio can be tricky. But given the skills of these managers,
it's worth making room for them somewhere.
(Follow us @ReutersMoney or here;
Editing by Lauren Young and Jeffrey Benkoe)