Family Values Portfolio

Author:
Publish date:

Lou Stanasolovich's

Family Values Portfolio

is created for a married couple with two children in grade school. Both parents work and contribute to 401(k) retirement plans. They own a home and are saving for retirement and their kids' college expenses. The couple is in the 28% federal tax bracket and is willing to invest in a moderately aggressive portfolio.

Most of this portfolio -- 70% -- is in stock funds, but Stanasolovich put 30% in bond funds so the portfolio will not be seriously damaged by a sharp drop in the market like the one we saw this summer. Within these allocations, he has chosen lesser-known, less-marketed funds because there can be a downside to selecting the popular fund of the moment. When a fund gets too popular, it can attract lots of money from new investors. A manager may then find that an investing strategy that worked with a small, nimble fund may not work so well with a billion-dollar behemoth. "I don't use household funds, except for

Vanguard

for index representation," he says.

With 12 funds, Stanasolovich's portfolio is the most diverse of those created by the

TSC

Portfolio Planners. He believes it takes this many funds -- sometimes more -- to have the major investment styles and asset classes represented. He begins by picking the appropriate investment style for the portfolio and he then finds what he believes to be the best manager within that style.

You may not have heard of some of the funds listed below, but you can rest assured that Stanasolovich thinks highly of their managers. "I meet with 75 to 100 managers a year and try to get to know them on a one-to-one basis," he says.

Stock Funds

The

(VFINX) - Get Report

Vanguard Index 500

fund is up 23.4% this year, so it's no wonder Stanasolovich has put 13% of the portfolio in it. Because of its low costs -- the fund's expense ratio is 0.19% versus an average of 1.52% for all mutual funds -- he believes it's hard for actively managed mutual funds to beat it. (For pro and con views of this fund, read our recent Fund Faceoff.)

Next he chose two smaller-cap funds. On the value front, 7% goes to

(SKSEX) - Get Report

Skyline Special Equities

, a growth fund with a superb long-term record. The $500 million fund, managed by Bill Dutton, has long been closed to new investors. But as is the case with many closed funds, it will allow investment by advisers who have a long-term relationship with the fund manager. Even though the fund is down 9.7% for the year through Nov. 25, Stanasolovich says "there isn't a better small-cap manager around." Dutton has delivered average returns of 18.4% a year for the past 10 years.

For investors who can't get into this fund, Stanasolovich suggests

(SPEQX)

Skyline Small Cap Value Plus

, once known as Skyline Special Equities II. Managed by Kenneth Kailin, the fund has a similar investment style, but invests in mid-caps as well as small-caps. It is down 7.1% for the year.

Stanasolovich also picked a micro-cap fund for additional growth exposure. The

(BJMIX)

Brazos/JMIC Micro-Cap Growth Portfolio

just opened in January 1998 and is team-managed. Although micro-cap stocks are new to these managers, Stanasolovich believes in them and says they have a strong track record in smaller stocks. The fund currently ranks first among its micro-cap peers and is up 20.4% year to date.

Stanasolovich has split 16% evenly between two international stock funds. The first,

(HAIGX) - Get Report

Harbor International Growth

, has holdings concentrated in about 25 large multinational companies, which makes the fund somewhat volatile. It's up 16.4% year to date.

(VEURX) - Get Report

Vanguard European Stock Index

tries to match the holdings of the

Morgan Stanley European Stock Index

. This fund, also weighted toward Europe, is much less volatile than the Harbor fund. It is up 22.9% for the year.

Real Estate and Flexible Funds

Stanasolovich allocated 13% to two real-estate funds, again dividing the money between a volatile fund and a less volatile alternative. Real-estate funds are down 14.8% for the year as a category, but he believes now is the time to get in. The "values are too good," he says. He notes that some real estate investment trusts held by these funds have 7% to 8% dividend yields, which are higher than Treasury bonds.

So he put 7% in

(PRREX) - Get Report

UAM Heitman Real Estate

, made up primarily of REITs. The fund is down 16.3% year to date.

The balance is in

(CSSPX) - Get Report

Cohen & Steers Special Equity

, which holds a concentrated portfolio made up primarily of real-estate stocks. This fund is down a whopping 32.6%. But Stanasolovich is a big fan of managers Martin Cohen and Robert Steers, whose

(CSRSX) - Get Report

Realty

fund has returned an average of 14.8% annually over the past three years. The Special Equity fund is closed, so as an alternative, Stanasolovich suggests

(LLREX)

Longleaf Partners Realty

, which is down 13.2% for the year.

Stanasolovich has allocated 15% to two flexible funds, both of which use options to hedge their stock positions. These funds are likely to provide a return that's higher than bond funds but somewhat less than stock funds.

(LCORX) - Get Report

Leuthold Core Equity

is an asset-allocation fund, which divides its assets between stocks, bonds and money-market funds. And on top of that, it hedges part of the portfolio with options, which makes for low volatility. This fund also has a 15% stake in REITs, which may explain why it's only up 8.5% for the year while its peers are up 11.1%.

Stanasolovich also chose

(COAGX) - Get Report

Caldwell & Orkin Market Opportunity

, which also uses a long/short strategy and did very well in the summer's down market. (See our recent story on the fund.) This fund, up 19.3% for the year, is closed to new investment. An alternative is

(BRMIX) - Get Report

Barr Rosenberg Market Neutral

, which has lost 2.0% for the year.

Bond Funds

Though this is a taxable portfolio, Stanasolovich has allocated 20% to the

(MGMBX)

Morgan Grenfell Municipal

bond fund because, he says, munis can provide a higher after-tax yield than taxable high-quality intermediate bonds, depending on your tax bracket. Manager Dave Balct specializes in credit analysis and focuses on selecting individual issues that have opportunity for credit upgrade and appreciation, says Stanasolovich. "His track record is second to none." The fund has returned 4.6% this year. (For more on munis, see our recent

primer.)

The remainder of the bond investment is split between

(NTHEX) - Get Report

Northeast Investors

and the

(PFORX) - Get Report

Pimco Foreign Bond

fund. Both funds have intermediate maturities, but the Northeast fund is mostly low-grade, high-yield bonds while the Pimco fund holds higher-grade bonds. Northeast has lost 0.2% this year, while Pimco Foreign has returned 7.3% year to date.