Portfolio Planners Prepare for Uncertain Year-End

After a rocky third quarter, TheStreet.com's Portfolio Planners are on the defense, raising cash levels and shifting bond allocations in preparation for an uncertain end of the millennium.

All four of the portfolios gave up ground during the third quarter. Losses ranged from a low of 2% for Ron Roge's Golden Years Portfolio, to 5.4% for Vern Hayden's Empty-Nester's Portfolio. (For a look at how all the portfolios fared, see the Scoreboard.)

All four portfolios remain in the black for the year through Sept. 30.

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Portfolio Planners Scoreboard

Despite the losses, all the planners earned their fees (in this case, virtual fees) by turning in a better performance than the benchmark S&P 500 index, which declined 6.6% during the quarter.

But as we point out every quarter, beating the S&P 500 is not the goal for these portfolios. Instead, each is designed to meet the needs of an imaginary client. TSC has been tracking the progress of these $100,000 portfolios since Jan. 1 of this year. To brush up on the ground rules, see our introduction to the series.

Of course, the four portfolios we have been following don't fit everyone's situation, so we occasionally ask one of the planners to examine a reader's investments and suggest improvements. This time, Lou Stanasolovich of Legend Financial Advisors in Pittsburgh offers advice to Jeff and Michelle Pokorny, a young Mississippi couple that has an ambitious goal of retiring in 20 years.

Now on to the portfolios:

Unlimited Future Portfolio

This portfolio, designed by Roxanne Fleszar for an imaginary 28-year-old with a long investing horizon, dipped 4.1% during the third quarter, dragged down mainly by losses in the small-cap sector.

Fleszar is nevertheless sticking with her two small-cap funds, (BARAX)Baron Asset and (SKSEX)Skyline Special Equities, though she's lowering her exposure to each by a few percentage points. She's also adding a mid-cap fund, (RSEGX)RS Emerging Growth, which will get a 6% allocation.

Meanwhile, she's more than doubling her fourth-quarter cash allocation to 12% from the previous 5%. "I just want to become a little more conservative," she says.

The portfolio's foreign portion is getting a makeover. Fleszar is dropping the struggling (GAMNX)GAM International fund following the departure of manager John Horseman and substituting (UMBWX)UMB Scout Worldwide. This fund, which saves money and dodges exchange-rate risk by investing primarily in American depositary receipts of foreign companies, can also be found in Roge's Golden Years Portfolio.

Family Values Portfolio

Stanasolovich's Family Values fund, designed for a working couple with a child in grade school, lost 2.5%, the quarter's second-best performance among the quartet of planners. Still, he has quite a few changes for the fourth quarter, most affecting his bond-fund allocation.

He is dumping two bond funds, (LCORX)Leuthold Core Equity and (PFORX)Pimco Foreign Investors, and reducing his allocation in the (MGMBX)Morgan Grenfell Municipal Bond fund. Assets from those funds are being shifted to Eaton Vance Advisor Senior Floating Rate, a continuously offered floating-rate loan fund. The fund, which invests in senior secured loans, is "unlike most bond funds in that the interest rate adjusts so that principal stays stable," he says. "In these unsure times, we're maintaining a cautious stance." For more on floating-rate funds, see a recent Fixed-Income Forum.

Also new to the portfolio is the (MERFX)Merger fund, an unusual fund that invests primarily in merger arbitrage situations. Because its return is barely correlated with the broader market, advisers often use it as a portfolio hedge. You can read more about this fund, which is closed to new investors (but available through advisers) in a recent Funds Notebook.

Empty-Nesters Portfolio

This portfolio, created by Vern Hayden for a middle-aged couple contemplating retirement in 10 years, dropped 5.4% during the third quarter. The (FFSCX)Forward Small-Cap Stock fund, added last quarter, and (LMVTX)Legg Mason Value Trust, the portfolio's core growth holding, were the biggest losers.

But Hayden says he'll stand pat for the fourth quarter. His biggest concern, he says, is not the faltering growth or small-cap funds but the value-oriented (CFIMX)Clipper fund, which has been a laggard all year. "I just think [co-manager] Jim Gipson knows what he's doing, so I'm going to stay with him one more quarter," he says.

Golden Years Portfolio

Ron Roge's portfolio, for a retired couple seeking increased income, was down just 2% during the quarter. Like several of his colleagues, Roge is concentrating his changes on the bond and international portions of the portfolio.

He's dropping (JAWWX)Janus Worldwide, a well-regarded global fund with mushrooming assets, for the smaller (ARTIX)Artisan International. This fund did well for Stanasolovich's Family Values Portfolio during the third quarter.

Roge is also shifting a portion of his (HABDX)Harbor Bond fund allocation to the growth-oriented (HACAX)Harbor Capital Appreciation fund. "The time to do growth is after the market corrects," he says.

Staff Reporter Tracy Byrnes contributed to this story.

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