The TSC Streetside Chat: Sheldon Jacobs of The No-Load Fund Investor

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TheStreet.com: OK, let me move on now and ask you about fund investing. First of all, you've recommended that investors with a portfolio of $100,000 could have as many as nine different funds, and you said portfolios worth $1 million could be split among as many as 20 funds. Why do investors need so many funds?

Sheldon Jacobs: If you're working basically with active managers, the industry is segmented today to a great extent. There are few funds out there that can buy anything [they want]. So you need to balance growth with value, large-cap with small-cap, and you need international exposure. On aggressive funds, I think it makes sense to diversify among managers, even if you have two funds more or less in the same area of the market. Different managers pick different stocks.

Maybe I'm just overly cautious, but there's a limit to how much money I want to put into one fund. When it gets to around $100,00 or so, I get really nervous, even if they're good funds or good managers. I just don't like having too many eggs in one basket.

TheStreet.com: You run a bunch of portfolios of funds. How often do you make changes in them, and why?

Sheldon Jacobs: There are two reasons we might change: One, the fund is doing poorly, or more commonly, for asset allocation reasons. But we don't have any particular set period [at the end of which we make changes]. Last year we were up to 50% in cash anyway, so we didn't have to do a lot of changing. We had started increasing cash in '99, and by 2000 we were up to 50% on Wealth Builder [the most aggressive of Jacobs' three model portfolios], so I wasn't in too bad shape no matter what I held. More of my changes are probably because the sector is out of favor, which is usually the reason why a fund starts doing poorly.

Sheldon Jacobs' Master Portfolio Best Buys Portfolios ranked from most aggressive to most conservative
Wealth Builder Portfolio
Fund	Objective	Recommended % allocation
(BEMVX Quote)Berger Midcap Value	Growth	5%
(VTSMX Quote)Vanguard Total Stock Market Index	Growth	25
(ARTMX Quote)Artisan Midcap	Growth	10
(LLINX Quote)Longleaf Partners International	International	10
(SGEGX Quote)Scudder Greater Europe	International	10
(TIGIX Quote)TIAA CREF Growth & Income	Growth/Income	5
(VMMXX Quote)Vanguard Prime Money Market	Money Market	35
Average beta: 0.61
Preretirement Portfolio
(VTSMX Quote)Vanguard Total Stock Market Index	Growth	20%
(PBMCX Quote)PBHG Midcap Value	Growth	5
(MVALX Quote)Meridian Value	Growth/Income	10
(LLINX Quote)Longleaf Partners International	International	7.5
(VEURX Quote)Vanguard Europe Index	International	7.5
(FRESX Quote)Fidelity Real Estate	Real Estate	5
(HABDX Quote)Harbor Bond	Bond	25
(VMMXX Quote)Vanguard Prime Money Market	Money Market	20
Average beta: 0.44
Retirement Portfolio
(LLINX Quote)Longleaf Partners International	International	5%
(PRESX Quote)Price European	International	5
(MVALX Quote)Meridian Value	Growth/Income	5
(SNXFX Quote)Schwab 1000	Growth/Income	10
(JABAX Quote)Janus Balanced	Hybrid	10
(HABDX Quote)Harbor Bond	Bond	20
(TIPBX Quote)TIAA CREF Bond Plus	Bond	15
(VFSTX Quote)Vanguard Short-Term Corp	Bond	10
(VMMXX Quote)Vanguard Prime Money Market	Money Market	20
Average beta: 0.27

TheStreet.com: Would you get rid of a fund because it gets a new manager?

Sheldon Jacobs: I generally ignore manager changes. Or, let me put it another way, for the largest mutual fund groups -- Fidelity, T. Rowe Price, Vanguard -- I almost totally ignore manager changes. I figure that the new guy is going to be as good as the old guy. And even if he's not, you generally have six months to see. It takes management at least six months to screw up a portfolio.

If you're recommending a real small group with one star manager, you've got to be more careful. But for most of the small groups with a star portfolio manager, he generally owns the company. If Garrett Van Wagoner got hit by a truck, I'd recommend the sale of his funds the next morning. But that's the only way he's going to be out of there, unless he retires and sells. "My opinion is the market is simply not going to run away this summer."

TheStreet.com: OK, so looking within your portfolios, is there one fund you'd single out that you especially like? Maybe you've held it longer than the others?

Sheldon Jacobs: If you want stability, you go pick the index, because active management never has quite the continuity that the index does.

TheStreet.com: What's your take on index funds, anyway? How much of a portfolio would you invest in them?

Sheldon Jacobs: In a normal market environment, which I'd define as one in which large-caps are holding their own, maybe having a slight growth bias, I'd go up to about 50% in an index in my equity allocation. If we got into more of a small-cap and value environment, I would lower that to 35% to 40%. But I would still keep at least 35% of the core portfolio indexed, because [it gives me] longer-term holdings and I want the benefit of lower costs.

I really only want to recommend two types of index funds, the S&P 500 and the total stock market funds based on the Wilshire 5000. The reason is they are broad-based index funds, and again, that goes to my earlier point that you should make as few forecasts as possible. My real preference is the total stock market index, which buys everything. The S&P 500 is basically a large-cap index, which means you're making the judgment that large-caps will be doing better than small-caps. But then, both are cap-weighted, which means even the Wilshire 5000 has a large-cap bias.

TheStreet.com: What kind of changes have you made to the funds in the portfolios recently? Have you gotten rid of anything?

Sheldon Jacobs: In the May issue [of the newsletter], we added a value fund and got rid of (RSVPX Quote)RS Value + Growth in the Wealth Builder portfolio. In that case, it just hadn't been performing very well. We added (BSCVX Quote)Berger Midcap Value because we wanted to beef up value a little.

We published a list of nine funds in the May issue that did well in '99, last year and this year. Since '99 was basically a year for growth and last year for value, these funds mostly have value in the name, but obviously they're not traditional value funds. All did at least 20% in '99. If we have an opening in our model portfolios, these are the funds that would be our first choice. So for people who want to buy something now, that's what I'm recommending.

They are (DMCVX Quote)Dreyfus Midcap Value, (WMCVX Quote)Wasatch Smallcap Value, (BSCVX Quote)Berger Midcap Value, (DODGX Quote)Dodge & Cox Stock, (RYLPX Quote)Royce Low-Priced Stock, (WVALX Quote)Weitz Value, (PBMCX Quote)PBHG Midcap Value, (MVALX Quote)Meridian Value and (PRNEX Quote)T. Rowe Price New Era, which is more of an energy play than anything. "I don't know very many laymen who know enough about a stock to own it. They buy on ridiculous recommendations."

TheStreet.com: What about allocations to different areas within the portfolios? Have you changed those much recently?

Sheldon Jacobs: We changed the allocations of the portfolios in January. In the Wealth Builder, we were at 45% cash and went to 35% cash. That was a response to the fact that the Fed had stopped tightening and was starting to ease.

At the moment, we probably don't have the intention of making other changes till the fall, for all three portfolios. Summer is generally not a good time for the market. A lot of studies show that most of the money is made in the winter months, not in the summer months, and I'm very comfortable with 35% cash. We have this problem in the Senate now [with the Democrats assuming the majority], we've got the California energy crisis, high gas prices and seasonality is against us. My opinion is the market is simply not going to run away this summer.

TheStreet.com: Earlier you talked about not listening to forecasters, but what's your sense of how things will end up this year? Do you think funds will manage to finish in the black?

Sheldon Jacobs: I think they will probably finish somewhat in the black. It's most unusual for broad indexes to be down two years in a row. The last time it happened was in '73-'74. So the odds are against another down year. Plus there's the fact that the Fed easing will take hold with a time lag.

TheStreet.com: We've talked a lot about funds, but are there any stocks that you like right now?

Sheldon Jacobs: No, I don't ever talk about stocks, mainly because I don't know anything about them. My general recommendation is, with rare exceptions, people should not own individual stocks. Because of [the need for] diversification, but also because the market is reasonably efficient, I don't know very many laymen who know enough about a stock to own it. They buy on ridiculous recommendations.

In the May issue I even did an article about funds versus stocks. I asked how much you know about your current holding: Have you estimated earnings per share for the current quarter, and if so, how does that compare to the Street consensus? How does the P/E compare to stocks in the same industry? If you do have a sales target, how did you arrive at it? Do you know why you bought it? Is that reason still valid?

Most professionals have done that work, and I don't know many laymen who do that kind of work on a stock before they buy it. And if you don't, you're just being carried along by the consensus. The way you make money with a stock is to have an informational edge. If you don't have that, there's no point to buying. You're better off buying funds that are diversified.