In sports, the need for an offense and defense is obvious. It's a little more subtle to realize that our actions throughout our lives represent an ebb and flow of offensive and defensive movements.
It should come as no great surprise that an effective mutual fund portfolio should have an offense that is creatively employed in up markets, and a defense that is always ready to ensure its survival in down markets. I like to see a portfolio that will capture at least 80% of an up market, and no more than 50% of a down market. So if the market (the
) is up 10%, I'm very happy to achieve 8%. On the flip side, if the market is down 10%, a 5% loss tells me the defense is doing its job.
When the print and TV media suggest that a portfolio, or even a fund, must match the performance of any given benchmark on a quarterly or yearly basis, they do a great disservice to the investing public. To encourage changes in a portfolio on a short-term basis can wreak havoc to a long-term strategy. A "top 10" quarterly list of mutual funds is perhaps the most useless list of information anyone could use.
You should avoid what is "hot" now and stay away from the latest fads. This is not how you accumulate wealth. Using mutual funds, you choose your investments by knowing how the management of a fund works and how it fits in your portfolio. For instance, my
sample portfolio on July 6 features some great managers. The one I want to highlight this week is
Capital Income Builder (CAIBX). This is a core holding that can invest in any asset class, as well as foreign markets.
You can slice and dice a fund any way you want and still not capture the brilliance of a manager. A description will always fall short of the genius a well-managed fund deserves. If you question that statement, try describing how a great quarterback like Joe Montana threw the ball, or how Michael Jordan could jump so high, twist and shoot the ball through the hoop.
There is that something extra the greats have, and it's not just a good quarter. It's that subjective "touch" or "sense" that makes the difference. When you know managers possess that extra, indescribable dimension, it will cause you to stay with them when the going gets tough.
When the Capital Income Builder fund was down 2.77% in 1999 while more than 100 other funds increased more than 100%, you had to have conviction to hang in there. This fund was designed to do three things. These three goals were allegedly articulated by actress Stephanie Powers (the significant other of William Holden for years) to a senior executive of Capital Research while the two chatted at a social event.
The story goes that when Powers was asked what she needed Holden's investment trust to do, she said she needed the portfolio to (1) give income; (2) be low-risk; and (3) gain enough to at least cover inflation. Soon after that conversation, the Capital Income Builder fund was created to serve those three purposes. Because Ms. Powers is on the board of the fund, I've always assumed the story has at least some elements of truth.
In 1999, you would have needed to understand that each of the eight portfolio managers of the Capital Income Builder fund had a value bias. Incidentally, another great manager by the name of Warren Buffett was down about 19% that year. Of course, the myopic financial press said, "Good old Warren is finally losing it!" If you understood what was going on in the market and how the manager's value bias related to the market, you might have had the conviction to tough it out.
In 1999 and in earlier years, money was being sucked out of the boring value stocks and funds. It had nothing to do with the quality of the investments. The investments had very good value, but at the time nobody wanted value. So what did they want? They were chasing tech! Literally throwing money at junk because "Things are different now!"
As the emotional money was chasing tech, the value managers stepped aside and said, "I really feel sorry for these folks; they're like lemmings headed for a cliff!" And they were. The S&P 500 lost 43% during the 2000-02 bear market, and the
lost 92%. Yet the Capital Income Builder fund not only avoided a loss, it was up in each of these years for a total of 17.9%.
Keep in mind that a good defense can score pretty well, too. I consider this hybrid, value-driven fund to be part of my defense in a portfolio. But if you want the quantitative stuff -- and it's only human to want it -- check this out!
While the S&P 500 is not the proper benchmark, it is the one everyone likes to see. The proper measure would be a blend of several benchmarks. Beyond the superior performance, the fund is much less volatile. That's a win-win situation.
These are the performance numbers through May 31:
Next week, I'll cover another fund or two in the portfolio. Please don't hesitate to give me your opinion.
At the time of publication, Vern Hayden had no position in any stock mentioned, although holdings can change at any time.
Vern Hayden runs Hayden Financial Group, a small boutique that does financial planning and investment management in Westport, Conn. An author of several books, Hayden specializes in portfolio management, specializing in mutual funds on a fee-only basis and financial planning with a focus on retirement planning.