Charting Your Course

How to translate last year's market lessons into this year's profits

pursue a contrarian strategy? “I’m not ready to change direction because of what has happened in the last two years,” he says. “If you go back 20 years, you’ll see that no asset class has excelled more than five years in a row. During those 20 years, in fact, small value stocks and international stocks had as many top years as large growth stocks. Even in 1998 and 1999, small growth funds went from near the bottom to one of the top-performing asset classes.”

DIVERSIFY, PART TWO:
SIZE MATTERS
In addition to a balance between growth and value funds, seasoned investors may also want to own funds that hold companies of various sizes. For both his company’s and his own portfolio, “I like small-cap stocks,” says Joseph Williams, “and I especially like Ariel funds, led by John Rogers and a strong management team. Good management is the key to any mutual fund.” Although Ariel Fund (which emphasizes small-cap stocks) and Ariel Appreciation Fund (which emphasizes midcaps) lagged in 1999 with -3.79% and -5.76% returns, respectively, they enjoyed excellent years in 1997 and 1998 and thus sport impressive three-year records of 16.63% and 12.21%.

Joseph Williams says he is also allocating fewer assets to international funds these days and more to domestic funds. “The U.S. market is the most attractive now, and you can’t ignore the increasing importance of technology,” he says. “Those stocks can be volatile, though, so it makes sense to reduce your risks by investing through a diversified mutual fund.”

Joseph Williams’ financial planner, Sidney Blum of Northbrook, Illinois, advises a large dose of large-cap stocks for investors’ portfolios. “Most investors want to own brand-name companies,” he says, “so those stocks probably will be the leaders.”

However, you should include some small-cap funds too. Ariel Fund is a good choice; so are Baron Asset Fund and Fremont U.S. Micro-Cap Fund. Baron Asset had disappointing returns in late 1999, but the fund has a three-year annualized return of 15.97% and a five-year annualized return of 21.42%. Fremont U.S. Micro-Cap, as the name suggests, buys extremely small companies. It’s not for the fainthearted, posting ups (54% and 49% in 1995 and 1996), followed by downs (gains of only 7% and 3% in 1997 and 1998), and then way up (gaining 130% in 1999).

Aggressive investors also may want to have a small portion of their portfolio in a specialized Internet fund. Blum says that he advises a few select clients to invest in Munder NetNet Fund, which holds established tech companies (Cisco Systems, MCI WorldCom, Intel) as well as speculative newcomers. The fund’s 1998 performance, a return of 97.9%, was a tough act to follow, but it managed-gaining 175.7% in 1999. However, if interest rates rise in 2000, investors will be taking a closer look at the books of highly leveraged tech companies and may not be so free with their shareholder dollars.

REBALANCING FOR
RETIREMENT
An emphasis on stocks and stock funds may be fine for younger investors, but what about those in or near retirement? Conventional wisdom

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