multi-asset managers

Many financial planners first decide on an asset allocation, for example 60% stocks 40% bonds and then find mutual funds or ETFs either passive or active, to implement the allocation. If an active manager is chosen, his job is to outperform his benchmark but *not* to shift to another asset class, which would be the "crime" of market timing. For example, a stock fund manager is not supposed to invest in bonds. The logic is that the financial planner is supposed to set the asset allocation and that mutual fund managers cannot time the market.

I think this is plausible at a macro level -- even many skilled stock- pickers might be unable to add value merely by changing their stock market exposure using S&P 500 futures. At the individual security level, this makes less sense to me. Many investment and commercial banks have recently raised money by selling convertibles, preferred stock, and straight debt, as well as common stock. Suppose a manager is bullish on a company that has all of these types of securities outstanding. Buying common stock might not be the best trade. Maybe he should buy the convertible or buy straight debt and short Treasuries of equivalent maturity to reduce duration risk, if the convertibles or bonds are underpriced relative to the stock.

There exist hedge funds that engage in "capital structure arbitrage". Even if a fund wanted to stay long-only, it could still substitute convertibles or corporate debt for common stock and do half the trade (without shorting the common stock as the hedge fund would).

If you accept the logic of having an actively managed fund doing individual security selection in all types of securities, not just common stock, the question is whether there exist managers qualified to do this. Balanced fund managers own stocks and bonds, so that could be a place to look. Any suggestions?

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Reply to
beliavsky
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I agree that the M* "style box" confines, and the resulting realities of the market for mutual funds, probably present obstacles for active managers who have good ideas about how to manage a more diversified portfolio. I am not aware of funds looking specifically for the situations you describe, but you might find one in the more flexible categories like asset-allocation funds, balanced funds, or even the income-focused funds (that M* often categorizes as "moderate allocation"). These categories include actively managed funds that might identify a "pricing opportunity" in one of several asset classes and be able to act on it.

But it seems the manager-selection problem is amplified, and that's the main issue (identifying a good manager before the fact). Let's assume the approach is valid...still, you would need a fund manager that is both a good stock manager and a good bond manager, and who can evaluate effectively the pricing discrepancies across the different asset classes, in particular with the relatively unusual situations where there are multiple securities to choose from.

And ultimately the returns are going to be driven more by the top-level asset allocation, rather than the ability to identify the "best" security to buy for a given company. That seems like the chasing-nickels part of the decision, but the fact that a dollar landed in bonds instead of stocks would be more of a factor to the expected returns, so more important to the investor.

I think it's interesting as a strategy for an investor to implement, but difficult for an investor to find in a manager. The returns are going to be very hard to evaluate...what would you benchmark against, to assess whether a given fund has produced above-average returns?

-Tad

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Reply to
TB

TACTX is a new fundx fund that tactically eases in and out of money market as appropriate. I don't think of this as market timing so much as an extension of their momentum strategy, where sometimes money market has the relative "momentum". Also, doesn't rydexfunds do some more comprehensive kind of strategy closer to what you depicted?

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Reply to
dumbstruck

One manager who does some of this is Marty Whitman (Third Ave Value), though his funds are 90+% equity:

"Another hallmark: He likes purchasing bonds in distressed companies with rebound potential. A big example is Nabors Industries. Whitman bought bonds in the oil-drilling company, which then filed for bankruptcy protection in

1987. A year later the company emerged and the bondholders' debt was converted into equity"
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Another manager who comes to mind (at least in terms of being well qualified to look at both stocks and bonds) is Bob Rodriguez. Though he seems to keep each of his funds "pure" (one invested in stocks, the other in bonds, but not mixed). He is quite creative in the types of bonds he uses in FPA New Income; I haven't followed his equity management style much.

"Robert Rodriguez has accomplished the unheard-of-feat: driving staggering returns in both a stock and a bond fund for more than two decades."

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Finally, a bond manager who has managed an equity fund (Fidelity Leveraged Company - FLVCX) to great success for the past five years is Thomas Soviero.
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Whether they have the skills to allocate assets is a question I've addressed at best obliquely, since their funds don't make major shifts in allocations. As to how to find these managers - read enough shareholder reports to understand the managers. No simple screen comes to mind.

Mark Freeland snipped-for-privacy@nyc.rr.com

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Reply to
Mark Freeland

This is the point of capital appreciation funds (such as Fidelity Magellan). The manager is more-or-less free to choose among the various classes of investments.

-Will

william dot trice at ngc dot com

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Reply to
Will Trice

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