Understand Upgrading

07/25/2003 12:00 am EST


We often profile leading advisors in this space; here we look at the upgrading strategy used by Janet Brown, editor of NoLoad Fund*X - one of the top performing newsletters. Interestingly, the system has also led to recommendations for funds managed by two other popular Money Show speakers - Jim Oberweis and Ron Muhlenkamp. (For more on the advisors and money managers cited below, please click on their photos.)

Brown, Janet Janet Brown's upgrading system makes a lot of investment sense, and its strong performance over the past 28 years attests to the logic of the approach. Indeed, those who followed this system for the three years beginning in March 2000 had positive returns while the S&P 500 fell over 40% during the same period. The upgrading system monitors the performance of mutual funds over four rolling periods - one month, three months, six months, and one year. The top performing funds based on all of these periods move to the top of the service's buy lists. Janet Brown explains, "If a fund's performance is consistently above or below that of similar funds, this is calledpersistence . This is the foundation of our approach to investing. Generally, it takes a few months of strong performance before a fund rises sufficiently in our rankings for the system to prompt us to buy it. By focusing our attention on capturing trends that last several quarters and ignoring the intermediate blips, we remove the need to forecast market direction. Instead, we invest with the current leaders and stay with them until new leadership takes over.

"Upgrading has three chief characteristics that are paramount to its success. First, the system does not attempt to make forecasts. It follows leadership, rather than anticipating it. When the market has been in a downward spiral for an extended period of time, the system has us in defensive funds that are holding up better than most. When the market turns, we typically find our portfolios lagging at first. After all, the funds that do well on the downside tend not to be the ones that surge off the bottom. Second, our system has a built-in 'lag' because it includes six-month and 12-month total-returns. This prevents us from jumping too soon. Third, we move assets incrementally. As the rankings change, we sell our lowest ranked holdings and replace them with the current winners. Simply put, rather than relying on forecasts, we let the market itself tell us what to do."

Here are some of the latest "Best Buys" from Brown's NoLoad Fund*X :

Oberweis, James "Top-ranked Oberweis Emerging Growth (OBEGX) is up over 56% since October 2002, and gained 30% year-to-date in 2003. All Oberweis Funds are managed according to the 'Oberweis Octagon', a set of eight criteria combining elements of both growth and value investing. Oberweis looks at growth first, and value second. The emphasis is on companies with rapidly increasing revenues and earnings with solid fundamentals. Oberweis applies a 30% threshold to growth of sales and profits, and P/E ratios are no greater than half of the company's growth rate in order for a company to be considered. A company must have a solid balance sheet, and show that it can sustain its growth. Oberweis follows a company's fundamentals closely, and when they start to slide, either due to negative sales or earnings growth or the appearance of a new competitor on the horizon, Oberweis plots his escape.

Muhlenkamp, Ron"Muhlenkamp Fund (MUHLX) is co-managed by father and son, Tony and Ron Muhlenkamp. They are upbeat about the market, and think the country is coming out of a normal, cyclical recession. The fund's performance is also heading upwards. Muhlenkamp Sr. (pictured at left) is a keen market observer who studies inflation and interest rates to determine whether to invest in stocks, bonds, or stay in cash. Since the managers believe the economic recovery is progressing normally,MUHLX is fully invested. Many positions stem from Muhlenkamp's judgment of the market climate. When picking stocks, the Muhlenkamps want above average return on equity - a measure of profitability found by dividing annual earnings by stockholder equity. The duo also likes a below average price/earnings ratio. They buy from the bottom up, but they edit investments from the top down to insure diversification. The fund is up 27.5% for the past three months."

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