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In a Down Market, Follow the Hybrid Funds

The table below shows the best-performing hybrid funds for the month of August. In a market such as this, where different themes and strategies can be in vogue at various points throughout the correction cycle, it pays to see the allocation decisions that top-performing managers are making.

We will focus on one-month return with this type of assessment of strategy, as three months or longer is likely to be too long for a trend to exist, especially given the current market gyrations and uncertainty.

As Einstein said, in chaos there is opportunity, and by looking at where the top funds are placing their bets and moving with these trends, it is still possible to continue to make profits from a declining market, and above all preserve capital. What we see is that there's more than one way to skin a cat.

The Robeco Boston Partners Long/Short Equity Fund (BPLEX) employs a market-neutral strategy that seeks long-term capital appreciation while reducing equity market risk.

The fund uses leverage to generate the 4.33% return for August, with 120% of its assets exposed to the equity market (i.e., it uses 20% leverage), and 85% of its investments are in the U.S. In terms of sectors, the fund invests in commercial services (11.5%), software (9.6%), Internet (8.1%), insurance (7.8%) and health care products and services (13%).

Here are the top holdings: Telular Corporation (WRLS), CAM Commerce Solutions (CADA) and LHC Group Incorporated (LHCG - Get Report).

The Greenspring Fund uses a strategy of investing in special situation bonds and undervalued stocks predominantly in the U.S. The strategy is more of a true hybrid compared with BPLEX, with the fund investing 32.5% in corporate bonds, 57% in equities and 10% cash. In equities it weights 15.66% to telecommunications, 9.98% to insurance (a sector also used by BPLEX) and around 7% to each of the following: engineering and construction, oil and gas, commercial services (also common to BPLEX) and semiconductors.

Top holdings include FTI Consulting Incorporated (GRSPX), Suncor Energy (SU - Get Report) and EMCOR Group (symbol). GRSPX is a much more concentrated strategy placing 40% of assets in its top 10 holdings, nearly twice as much as BPLEX with 22%.

The final fund we look at is The Manning & Napier Fund (MNBAX). This fund employs very different strategy in that it has 77% of assets in cash and only 16.6% in U.S. equities and 4.52% in government bonds. This strategy has not worked well on a year to date basis (YTD) as the fund is down the most at -8% but in the last month it has worked very well and compares favorably with the other funds invested in the markets. Just goes to show that cash is not a bad strategy right now. And who doesn't love cash?

Top-Performing Hybrid Funds
NAME Ticker Return 1 Month Return 3 Month YTD
Robeco Boston Ptrs Lg/Sh Equit Inv BPLEX 4.33 0.93 1.88
Greenspring Fund GRSPX 3.53 -0.16 3.48
Manning & Napier Pro-Blend Max Term EXHAX 3.50 -4.53 -8.07
1st Source Monogram Long/Short FMLSX 3.37 -0.12 2.76
UBS Dynamic Alpha A BNAAX 2.94 -2.77 0.40
Manning & Napier Pro-Blend Ext Term MNBAX 2.75 -3.25 -3.25
ING T. Rowe Price Cap App A ITRAX 2.62 -3.10 -1.41
T. Rowe Price Cap Appreciation Fd PRWCX 2.55 -2.96 -1.11
Manning & Napier Pro-Blend Mod Term EXBAX 2.26 -2.03 -3.50
Mosaic Balanced Fund BHBFX 2.24 -2.45 -3.41
Sam Patel, CFA, is the manager of mutual fund research for the Ratings.

In keeping with TSC's Investment Policy, employees of Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Patel cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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