One thing I like about Bill Miller of
Legg Mason Value Trust is that he is not trying to please anyone but his investors. He is divergent, original and an independent thinker. Style drift? Forget it -- that's your problem, not his. He's the
of the mutual fund industry. Lucas, of
fame, produces a long way from Hollywood in the beautiful rolling hills of Marin County, just north of San Francisco. He makes films his way.
Miller is a long way from an asset allocator's dream. He's a pigeonholer's nightmare. But he makes a perfect manager for my offense. Whether he's a value, blend or growth manager is irrelevant. He has been using his own consistent style for 15 years, producing one of the most enviable track records in the business.
I prefer managers who lead and do not necessarily follow a predesigned asset-allocation formula. A manager's investment strategy should be flexible enough to assess a current market condition and recognize changing investment opportunities.
William Jahnke, a financial planner from Palo Alto, Calif., says it more succinctly. In the April 1999 issue of
Dow Jones Investment Advisor
, he wrote:
The view that there is nothing to be gained by the ongoing evaluation of investment opportunities and the positioning of client portfolios in response to those opportunities is extreme and dangerous. The fact that assessing future prospects is difficult and subject to error is no defense for not doing it. Given that most allocated investment solutions are poor interpretations of investment theory and have little to do with meeting financial objectives, the advice "to stay the course" is especially hollow.
One of the leading proponents of "staying the course" is Roger Gibson, who wrote the book,
. Representing the antithesis of Jahnke, Gibson wrote in the March 1999 issue of
Journal of Financial Planning
: "Unless you possess the market timing skill to predict which asset class will be superior, a diversified approach remains the best strategy."
When I create a mutual fund portfolio, I use a combination of managers with three different behavioral patterns. One pattern is represented by Bill Miller, who has a freer style of management. The second is a manager who adheres to a particular style, such as value or growth. The third is a manager who specializes in one particular sector or region of the world.
As readers of this column know, I then classify managers/funds as offense, defense and special teams. The offense is composed of managers who have demonstrated an ability to take advantage of current market opportunities. This is where a freestyle manager shines. A specific style manager will also do well if his or her style happens to be the one working. If it isn't, at some point I replace that manager with a different style manager. Admittedly, this is a timing decision. The same holds true for a sector or geographic manager. That is why I pulled out of Europe last year. It is never a precise formula. It is very subjective, mostly based on observation, intuition and the volume and velocity of money flows.
Offense is geared to make money. Defense is geared to protect a portfolio from losing the money that the offense is making. At times, good defensive managers also can score points. Higher risk is introduced into a portfolio with the special teams. Special teams basically make a timing call on a sector, such as financial, health or technology.
Assigning the right kind of manager (or fund) to offense, defense and special teams forms the basis of an effective mutual fund portfolio. Of course, this must be done in the context of your specific goals and tolerance for risk. This approach will never make the
business schools, but it works for me and my clients. Oh yeah, don't forget to see George Lucas' new
film this summer,
Episode I: The Phantom Menace
. It's done his way.
Vern Hayden is a certified financial planner with American Planning Group in Westport, Conn. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While he cannot provide investment advice or recommendations, Hayden welcomes your feedback at