A New Twist on an Old Strategy

Chris Davis, a mutual fund analyst at Morningstar, says the majority of mutual funds that employ market neutral strategies "haven't been particularly successful," except for the Calamos Market Neutral Fund. The Calamos fund, which is now closed to new investors, gained 8% in 2001 and nearly 7% in 2002, Davis says. And over the past five years, it gained 10% annually, he says. "That's pretty much what you're promised with these kinds of funds–that you're going to be making money in any kind of environment." Davis issues this cautionary note to investors: "Any class of funds being launched en masse by all types of different fund companies is a reason to be skeptical."

Given the equity market's recent rally, you'd think that firms starting up an asset allocation fund now would be late to the game. But Rich believes "this is the beginning of the trend toward asset allocation funds." Why? Because most mutual fund companies, he says, are starting to give their existing mutual funds the flexibility to short stocks. While Rich has seen signs of this already, he says, in some cases, it may not be such a good thing. "Some of the funds that are already out there that can short stocks are not very good investment choices for individuals because the people who are managing these funds have no experience in shorting stock," he says. Most mutual fund managers have never worked in the hedge fund world, he says, where shorting stocks is common practice. Rich predicts the Technical Chart Fund will likely perform better than other funds that use shorting strategies because of his previous life as a hedge fund manager, and because the fund uses technical chart analysis. "Shorting stocks based on fundamental values rarely works," he says. "You can't short stocks based on fundamental analysis, because shorting stocks is basically a timing issue. Technical chart analysis helps you analyze money flow in and out of stocks and in and out of industries. That's why we're able to have success on the long and short side."

Edwin Friderici, VP of marketing and product manager at Phoenix Investment Partners, agrees with Rich that asset allocation funds will remain in vogue because investors' appetite for risk has shifted to more conservative funds. Friderici cites recent data compiled by the mutual fund research and consulting firm Strategic Insight, which found that year-to-date as of June 30, 29%, or $10.7 billion, of net new flows to domestic equity funds went to asset allocation funds, which includes the two Morningstar fund categories "conservative allocation" and "moderate allocation." The conservative allocation strategy funds attracted $7.5 billion during this period, Friderici notes, while moderate allocation strategies attracted $3.2 billion. In June alone, $3.9 billion–or 21%–of net new flows to domestic equity funds went to moderate ($2.1 billion) and conservative ($1.8 billion) funds. Over the past three years, he says, "investors and advisors have become more concerned about risk."

Only the Long-Term Need Apply

Unlike pension funds and endowments, retail investors usually chase hot stocks, and therefore "tend to be concentrated in a certain style or capitalization, so there's a lack of diversification," Friderici says. A recent Dalbar report found that the average total return of the average equity investor between 1984 and 2002 was a measly 2.57% compared to 12.22% for the Standard & Poor's 500. So investors aren't even beating inflation, Friderici notes.

When compared to other asset allocation funds, Friderici says, Phoenix's new funds offer from 30% to 70% less risk than their peers. Because they invest in alternative financial products, he says, Phoenix's funds "are giving retail investors the chance to invest like institutions." Institutional investors have been successful over the years, he says, because "they have a process; they identify their goal based on their needs, and once they have that goal, they develop an investment policy statement. They also have a rigorous process whereby they select diversified managers for their portfolios, and then they have a system of monitoring and rebalancing as appropriate."

The Phoenix funds are geared toward "long-term investors," Friderici says, "so they're perfect for IRAs or IRA rollovers." The seven underlying strategies within each Partner Select Fund are managed by six of Phoenix's independent investment managers. Phoenix owns 11 investment partners across the country, and "they all have different styles of managing, so you don't get group-think here," he says. "They're not drinking from the same research pool, so it's diversified managers with multiple styles." And instead of monitoring and measuring 50 to 70 funds for their clients, he says, advisors can use one Phoenix fund and "focus their attention on the client."

Washington Bureau Chief Melanie Waddell can be reached at [email protected].