More mutual funds play both sides of the market
130/30 funds try to profit from winners and losers alike.
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Clearly, such funds won't suit every investor. Overall, "people need to think very carefully" about getting into them, says financial adviser Karen Altfest of L.J. Altfest & Co. She wouldn't recommend 130/30 funds to conservative investors and those who need every penny to get them through retirement.Skip to next paragraph
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Those who buy these funds should "use them in the portion of their asset allocation they would assign to riskier investments," she says.
At least on the mutual-fund side, performance has been a problem lately for many (although not all) 130/30 funds. Consider the average returns of the 20 such equity funds in Morningstar's database. This year, through April 16, that universe of 130/30 funds averaged a negative 7.5 percent total return, versus the lesser 6.5 percent drop of the S&P 500 stock index.
For calendar year 2007, Morningstar had data on seven 130/30 funds, showing returns that ranged from a 14 percent gain to a 7.7 percent decline.
So far, "we're not seeing any compelling reason why investors need these funds," holds Marta Norton, a mutual-fund analyst at Morningstar. On average, the funds "aren't living up to their promises."
"Because they [can both] short stocks and can have an extra-long exposure," their performance "should edge past that of funds that can go only long," she says. "But it hasn't quite worked that way."
Fidelity spokesman Alexi Maravel says that the firm's new 130/30 fund is "designed to capture better risk-adjusted returns in all market environments."
Yet financial planner Louis Stanasolovich wouldn't recommend "jumping on the 130/30 bandwagon now."
"I do think they make sense for investors," he says. "But in this part of the market, which is a cyclical bear market correction, if not a bear market, I don't think they make sense right now. However, in rising markets, they could capitalize on the leveraging on the long side of the portfolio…. In effect, you own more stocks than the normal portfolio would," he explains.
A few beat the market
But evidently even rough-and tumble markets are manageable for some 130/30 fund purveyors.
One case in point was last year's showing by Nicholas-Applegate Capital Management in San Diego. In the beginning of January 2007, the company launched a 130/30 global equity strategy as a separate account for institutional investors. For 2007, its composite return was a 40.7 percent gain – before fees – versus the 12.2 percent rise of the MSCI All Countries World Index, reports Nicholas-Applegate spokeswoman Susan Hunter.
Partly as a result of that high-charged showing, Nicholas-Applegate unveiled a 130/30 global equity mutual fund (minimum investment: $250,000) on April 1, Hunter says. It will using the same management team and techniques that scored so well last year, she says.