Asset Allocation Comeback - Black Enterprise

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Black Enterprise Magazine September/October 2018 Issue

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At a glance, the first half of 2000 was not exactly a bonanza for investors. The widely-followed Dow Jones Industrial Average peaked in January (at more than 11,700), plunged in February, recovered and retreated, only to wind up at less than 10,500, or down 9%, for the six-month period. The Nasdaq composite index, heavily weighted towards technology stocks, had its ups and downs-minus 2.5% for the first half of the year. Equally, the Standard & Poor’s 500 Stock index lost less than 1%.

With all the major averages coming up negative, most individual stock investors lost money. Those folks who invested their money in mutual funds-a total universe of more than 9,000- fared much better. The average domestic equity fund gained 4% in the first six months of the year, according to Chicago-based Morningstar Inc. Now, the idea of earning 4% for the first half of the year may not thrill you, considering the broad stock market (measured by the S&P 500) has returned nearly 11.05% per year for the past five years.

However, the average return for stocks is 13.72% per year (or 6% for the first two quarters) over the last 30 years, reports Ibbotson Associates in Chicago, which tracks historic stock data. What should rouse you is the knowledge that some mutual funds have beat the market’s historic returns.

In looking at the market, investors are no longer just focused on one sector-namely, tech. They are balancing their portfolio in order to gain diversification and the highest returns.

Specialty funds were indeed special. Healthcare funds, which had lagged behind the market the previous four years, assumed the lead with average returns of nearly 40% by the second quarter. “There was a great deal of excitement in the biotechnology area in the first half, which helped these funds,” says Christine Benz, associate editor, Morningstar Inc. “At the same time, some of the major pharmaceutical companies performed well in the second quarter.”

In second place, natural resources funds gained 14% in the first half. Such funds typically hold energy stocks, which likely will profit from higher oil and gas prices: in mid-2000 a barrel of oil sold for $32.50, up from $19.68 a year earlier.

Also performing were real estate funds, up nearly 13%. “A strong economy means excellent operating results and increased cash flow from real estate properties, which will lead to higher values in the long-term,” says John Kramer, president, Kensington Investment Group, Orinda, California. The company manages the Kensington Strategic Realty fund, which stood out in 1998 and 1999, zigged and zagged and wound up with an average return of more than 5% for the first half of the year-decent but not breathtaking.

The losers in the specialty funds category were clearly precious metals (typically gold funds), which have been disastrous for investors since 1993; the first half of 2000 was no exception. Precious metals funds were down 15%. Financial funds fell more than 2%, with the Federal Reserve raising interest rates.

Communications funds, strong performers the previous three years, dropped 4%;

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