There are times when good stock selection is a winning strategy. Other times, portfolios shine because their managers have spotted important economic trends and industry developments. But its rare that one fund can take advantage of both.
Leuthold Global Fund (GLBLX), which relies on tactical asset allocation, tries to find the silver lining in whatever market it finds itself. Based in Minneapolis, the $345 million fund is one of a small stable of offerings from Leuthold Weeden Capital Management, which also manages money for institutions.
Leutholds signature style is making frequent changes to its investments based on reams of economic and company data. The flagship Leuthold Core Investment Fund (LCORX) was started in 1995 by firm founder Steve Leuthold, who gained a following by accurately predicting back in the 1980s that inflation would mellow, oil prices would stabilize, and stocks and bonds would perform well.
Leuthold is retired now, but a younger generation of portfolio managers continue to employ his trend-watching style and frequent trading in the hopes of jumping on an upswing or often more important avoiding a meltdown.
MOUNTAINS OF DATA
The Global Fund uses much of the same data as Core Investment, but on a worldwide scale.
To build the portfolio, the managers say they look first at about 130 drivers of the global economy GDP growth, central bank moves, supply and demand. That determines how much of an allocation to stocks the fund should have.
They then drill down into industries and sectors, deciding what types of stocks to own. Their universe is the 5,000 most liquid names in the world; the managers break these into 93 industry groups and rank them. Finally, they look at specific stocks. The managers have a value bias, believing this gives them downside protection.
The result is a fund with around 15 industries and between five and 15 names within each industry. We want an unemotional process to guide our investing, but its not a black box, insists Matt Paschke, the funds co-manager.
Over the 12 months ended May 1, Leuthold Global is up 12.9%, in the world allocation categorys top 9%. For the three years ended May 1, the fund is up an average of 5.6% a year annualized, better than 54% of its world allocation peers; for the five-year period, the offering posted a 13.5% annualized return, besting 75% of competitors.
Though the managers do not specifically seek out particular regions, they are well diversified globally. Where we invest on a regional basis, it is simply a fallout from our industry work, says Doug Ramsey, the funds other co-manager and Leuthold Weedens chief investment officer.
The global nature of the supply chain means that companies in the same sector can be located in different parts of the world and yet have more in common with each other than they do with other firms domiciled in the same place, he says.
Take technology. One device may have components and software from more than a dozen countries. Its not like we say, 'We want to own Taiwanese semiconductor names, Paschke explains. But when we look at what are the best semiconductor companies out there, it may lead us to some Taiwanese names.
Once a month, the managers revisit their assumptions about the global markets. About 8% of the portfolio changes on a monthly basis.
And there are times when the models diverge on the macro and micro level. A weak global economy could still produce compelling industries and stocks.
In late 2008, for example, the model turned bearish, but the fund was finding plenty of opportunities in defensive sectors that it thought would hold up well during downturns. As the economy deteriorated further, that stopped working too. What did work was our valuation work at the individual stock level, Paschke recalls.
The worldwide economy now appears to be performing well, though some areas are more compelling than others, Paschke and Ramsey say. With a 69% allocation to stocks, the fund is currently at the upper range of its equity allowance of 30% to 70%.
And the sector plays are doing much of the heavy lifting. After more than four years of high correlations between different sectors, thats starting to reverse. Leuthold Global is leaning more on its groups, and Paschke says that much of the recent performance has been because the fund was able to find the right sectors rather than stocks to buy. There should always be a time when something is working, he says.
As of early May, about 44% of the funds equity portion was invested in the U.S., and emerging markets accounted for 20%. The fund has been adding aggressively to emerging markets in recent months due to their valuations.
There is a disparity between the U.S. and the global markets, where valuations are quite a bit lower, Ramsey says.
Leuthold is especially wary of U.S. small caps at the moment, seeing them as relatively expensive.
PICKING & CHOOSING
The managers have also favored the tech sector, which has become the equity portions biggest weighting, at around 25% of assets. Yet they eschew headline-grabbing names like Facebook, Amazon and Netflix, because they believe those valuations are approaching bubble territory. Rather, they prefer old-school business technology like computer peripherals and semiconductors. Were potentially coming into a true capital spending cycle on the corporate level, Paschke says.
A year ago, the fund had no tech exposure and was heavily weighted toward consumer staples. But the managers noticed that valuations in this part of the tech sector were compelling. The problem, however, was that they were too compelling; prices kept falling until they stabilized about a year ago.
Thats when Leuthold moved in.
Thats the sweet spot of our industry work, Paschke says. Its not enough to say that something is cheap, lets go buy it. It has to be on its way back up.
Consumer discretionary adds another 24%, with auto-related stocks making up the biggest piece. One key trend: After years of diligently repairing cars, consumers are starting to buy new ones again. Weve had automobile components for about two years, Paschke explains. Roughly a year ago, we added automobile manufacturing.
Another big industry in the fund is insurance, though that theme is in its latter stages, and Paschke thinks that it might be edged out at some point by a sector with more room to run.
In addition to the stocks it is long, the fund maintains a small short position and a 22% weighting to bonds, managed by Chun Wang. (The remainder is in cash.) The bond portion is mostly invested in sovereign debt and acts as a shock absorber, Ramsey says.
Since the recession, theres been tremendous appetite from advisors to find investments that could dodge market turmoil the next time. And tactical asset allocation funds purport to do that, by constantly looking for whats working and what may be on its way back down.
Yet there are drawbacks most notably, trading costs incurred by frequent moves in and out of positions. Thats reflected in the funds total expenses. With a turnover rate that tops 100%, Leutholds 1.51% fee is high even for a global allocation fund. Still, Leutholds long track record of spotting upswings and dodging downdrafts could make it more compelling than most. FP
Ilana Polyak, a Financial Planning contributing writer in Northampton, Mass., has also written for The New York Times, Money and Kiplingers. Follow her on Twitter at @ilanapol.
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