Overlooked Managers: Two Guys With Two Goals

"We were well exposed to risky assets like high yield corporate bonds a year ago but we have gotten out of them, so we've avoided their downturn," Wright says.

The Core Fund has also decreased its exposure toward equities (it only has 3.1% of assets under management invested in preferred shares), another area that Wright believes is risky and always has been, yet has somehow got middle class America in its clutches. "The U.S. is the only country on the planet that believes that stocks are the only good thing to have in a portfolio," he says, "and Wall Street and the mutual fund industry are responsible for this cult of equities, propagating studies about how stocks are good in the long run and how they will always outperform other asset classes and are necessary for the growth part of a retirement portfolio. Looking at market history, though, those theories are all flawed."

In addition to the fact that the dramatic fluctuations in stocks throughout history–movements that can be and have been extremely painful for investors–Wright also believes that there is cyclical reason to be cautious about equities this year, since with just two exceptions in 1986 and 2006, stocks have always trended down in the second year of a presidential cycle. "We have a cautionary respect for the presidential cycle because in the past, the second year of the cycle has resulted in a significant decline in the stock market," he says.

That is most likely to be the case this time around as well, since after several extended rallies that began back in March 2009, the major U.S. stock market indices peaked in late April and then turned down, Wright says. The S&P 500, he says, has declined over 13% in the current downtrend, and most markets elsewhere in the world are down even more than that.

"With a more top-down view, we've seen that China peaked and then turned around in August 2009. Europe peaked and then turned, and finally, the Dow was the last man standing," Wright says. "When you see patterns of successive downturns, it tells you that everyone who was struggling piled into the last category, and this is never a good thing."

Wright expects more stock market decline ahead, punctuated with strong but brief rallies, so his aim is to protect the Core Fund on the downside from experiencing overall declines by steering it away from equities and riskier assets such as high yield bonds that are more correlated to the equity market, and more toward those asset classes that are likelier to benefit from the flight to quality and investors seeking safe havens. U.S. Treasurys, of course, have been doing well over the past months based on the decline in investor confidence and catalysts such as the European debt crisis and the Gulf oil spill. The U.S. dollar, high grade corporate bonds and agency bonds such as those of Ginnie Mae are also benefiting from this change in market dynamics, as are municipal bonds–which may come as a surprise to some given all the press headlines about the teetering solvency positions of states and cities across the nation.

But "when some people got scared of every bond category in 2008, munis were also punished so whatever concerns people might have are already priced into the muni market," Wright says. Wright and Sleeper–both of whom are personally invested in the Core Fund–manage a total of $880 million in assets and they co-founded Sierra Investment Management in 1987.

Savita Iyer-Ahrestani is a freelance business journalist currently based in New Jersey. She can be reached at [email protected].