Individual investors might consider bulking up their portfolios using "mutual fund barbells" modeled after other types of barbells found among professional investors, suggests Bloomberg columnist Chet Currier.
A bond barbell, for instance, would combine short-term money market funds with the longest-term bonds, while a futures barbell would mix a commodity's nearest and oldest contracts.
A mutual fund barbell, Currier suggests, would combine stock index funds or exchange-traded funds with the common shares of one or more publicly traded find management companies. "Barbells involve playing the market at its outer ends, with the aim of getting a better result than you could attain in the middle," he says.
Currier himself has no experience with these strategies directly, he said, as he is prohibited from investing in fund manager's stocks, since he writes about their businesses.
Mutual funds may seem like unconventional material for a barbell, since they have no maturities and their price are set only once daily, but barbells are malleable, Currier said.
The two ends of the barbell are opposite extremes of diversification, Currier said. On one end, investors will know that low-cost indexers offer an advantage, but may not be able to shake the sense that "smart money" beats the index. On the other end, investors might recoil from the idea that their fund company's stock might outperform its own funds.
If an investor puts money on both ends of the ballast, concentrated risk will be offset by diversification, and averaged together; the result may be better than a straight index.
Currier creates a sample barbell from 10 years ago using $10,000 worth of the Franklin Flex Cap Growth Fund, $5,000 invested in Franklin Templeton and another $5,000 in the Vanguard Total Stock Market fund.
Between March of 1996 and March this year, the Flex Cap fund returned 11.4%, beating the Vanguard fund by 2.4 % annually. The initial $10,000 investment after 10 years is worth $29,526.
But the 50-50 mix of Franklin Resources stock and Vanguard fund fared even better, growing from $10,000 to $39,104. The Franklin stock rose 18.4% annually.
However, barbells are no panacea, Currier warns, since they do not provide a defense against a decline in stock prices.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.