It finally paid to own a diversified portfolio in the second quarter.
After a long stretch in which large-cap and technology stocks dominated, the March-through-June period saw a wider array of winners, from micro-caps to real estate investment trusts. And those broad-based gains were reflected in the four model portfolios assembled by the
All posted solid gains within sight of the second-quarter 7.1% return of the
. One portfolio even beat the S&P's return. The only minus signs appeared next to bond funds, which faltered as interest rates pushed higher, and international funds, which were dragged down by weakness in Europe. (For a closer look at how all the portfolios fared, see the
Of course, beating the S&P 500 is not the goal for these portfolios. Rather, each $100,000 portfolio, which we have been tracking since Jan. 1, is designed for the specific needs of their imaginary clients.
Here's a brief look at the ground rules. These portfolios are not in competition, so we asked the planners to pick funds most appropriate to their imaginary clients' circumstances rather than risking it all for a high return. We allowed the planners to pick institutional funds or funds that are closed to new investment because they often are able to do that for their own clients. And we wanted their picks to be as "real world" as possible. (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 look at a reader's portfolio and suggest a makeover. See what Roxanne Fleszar of the Peabody, Mass., advisory firm
Financial Resources Management
recommends for Doug Harmon, a 22-year-old recent college graduate who recently went to work for one of the Baby Bells. Now to the portfolios:
Unlimited Future Portfolio
This portfolio, created by Fleszar for an imaginary 28-year-old with a long investing horizon, returned 5.2% for the quarter. The portfolio's performance was dragged down by a negative 4.3% return for
Janus Twenty, which ran out of gas in the second quarter after a spectacular run, and a negative 1.7% return for the
GAM International fund. But Fleszar says she'll stand pat with GAM International in the portfolio for the third quarter.
Janus Twenty was still up a healthy 17.8% for the year at the end of the quarter. And GAM International manager John Horseman "is a value-oriented kind of manager, and he's sticking to his discipline," says Fleszar. "He owns a lot of banks and insurance companies and consumer durables. They just haven't rebounded. But all of these companies are having double-digit returns, so
the fund should come back."
Family Values Portfolio
Lou Stanasolovich of
Legend Financial Advisors
in Pittsburgh says he's "pretty satisfied with the way things are going" for his portfolio, designed for a working couple with kids in grade school.
This highly diversified portfolio (11 funds) gained 7.2% for the quarter. It was the only one to beat the S&P 500's 7.1% return. The portfolio was powered by a 27.5% return of
Brazos/JMIC Micro-Cap Growth and a 16.9% performance by the once-downtrodden real estate fund
Cohen & Steers Special Equity.
Skyline Special Equities, a small-cap value fund that was down 11.8% at the end of the first quarter, came roaring back to post a 15.3% gain in the second quarter.
For the third quarter, Stanasolovich is adding the small-cap
Acorn International to the portfolio and reducing his holdings in two larger-cap international funds,
Vanguard European Stock Index and
Harbor International Growth. "It seems like the small-cap international sector has recovered somewhat," he says. Acorn International was up 15.5% for the quarter and 16.8% for the first six months of 1999.
contributing editor Vern Hayden is revamping his fund for the third quarter, hoping to build on a solid 6.6% second-quarter performance. The fund, designed for a middle-aged working couple with kids in college, is losing its bond fund and gaining more small-cap, value and international exposure.
"The portfolio is still growth-oriented, but with a value tilt," says Hayden. The new funds are
Thornburg Value, a large-cap value fund,
Longleaf International and
Forward Small Cap Stock, a new fund run by Irene Hoover, who had an impressive track record at
Jurika & Voyles Mini-Cap fund.
To make room for the new funds, Hayden is reducing his holdings in
Vanguard Growth Index,
Clipper fund and
Vanguard Health Care, and he's dumping
Harbor Bond altogether.
Because his imaginary clients have a 10-year horizon, Hayden says they can drop the bond fund and go for more growth. "I think three or four years would be enough to overcome most of what would happen in a heavy correction," he says. "Overall, the big picture is pretty positive so I'm willing to take some short-term hits."
Golden Years Portfolio
This portfolio returned 6.8% in the second quarter due in part to a 12.4% gain in
Baron Small Cap, a fund presciently added at the beginning of the quarter.
Ron Roge of
R.W. Roge & Co.
in Bohemia, N.Y., assembled this fund for a retired couple seeking additional income. It performed during the second quarter as a balanced portfolio should, getting strong -- though not spectacular -- returns from all of its equity holdings. The only red ink was recorded by the portfolio's two bond funds, Harbor Bond and
Janus Flexible Income, but Roge says they'll recover, and he'll stay with the same lineup of funds for the third quarter.
"I expect interest rates to be down by the end of the year. I just think there's a lot of excess capacity around the world, and that's not going to drive interest rates any higher," he says.
The TSC Portfolio Planners series aims to provide general fund and investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.