Ivan's Fund Strategy

08/22/2003 12:00 am EST


Ivan Martchev is the mutual fund guru at KCI; he oversees the mutual fund portfolios for both Wall Street Winners and Personal Finance.  He says, "I've been extremely defensive over the past few years, and we've beaten the market very handily. Our theme has been to focus on investment strategies that are not particularly mainstream." Here he explains his outlook.

"We are now experiencing a pretty extraordinary time in the financial markets the third quarter of this year. We have seen something that I didn't think I would see anytime soon; bonds, stock, gold, and just about everything else started moving up as if there was no tomorrow. These are very rare events, since these relationships between various asset classes have been established for a long time. It used to be that when gold was strong, the stock market was weak; when the dollar was weak, the stock market was also weak; and when bonds were strong, the stock market was weak. But it hasn't quite worked out that way.

"We've seen that these unusual events were actually a prelude to a big change in the markets. There was quite an extraordinary top in the bond market that will probably stay with us for some time--probably at least a year or so. In this sort of situation, it becomes extremely difficult to diversify among mutual funds--a strategy that has been paramount to success over the past three years. The major classes with which investors diversify with funds are bonds and stocks, and some cash. But you cannot really diversify if all your asset classes are moving in the same direction. To counter this, many fund investors start trading, which is not what mutual fund investing is about. Mutual fund investing is about compounding. So it's a challenging time as far as fund investing is concerned. The way to approach this problem is that there should be a little more active management and to increase your cash positions until those relationships return to their regular state of affairs. 

"The things that have really been working out is Asian funds, some of which have provided positive returns for the past two to three years. In addition, gold as an asset class and bonds have also done the same. Currently, what I would recommend for fund investors who have heavy exposure to bonds is to not liquidate their bond holdings but go to a short duration and go to more conservative bond funds until we have a clearer idea as to whether this current spike in interest rates is over or not. For stock fund investors, I would recommend that you not be extremely aggressive. Last year, the top in the market was nailed--to the week--by the extremes in sentiment readings. The all-time low for bearish sentiment for last year was hit in the week of March 2002 and for this year, the extremes in sentiment were reached in the second week of June. Further, this time of the year--August through October period--has a negative bias, suggesting that it is not a prudent time for investors to become too aggressive with stocks."

Meanwhile, the daily e-mail newsletter ByGeorge!  offers some specific picks among less mainstream fund opportunities. "While US growth may be somewhat subdued, there are various pockets beyond the US, that are offering growth. Sure, the US is plodding along; but while many stocks here at home are still grappling with mediocrity, there are some markets where growth is magnificent. All it takes to find these markets is to look a bit beyond the US to where capital is flowing and where workers want to make more of their lots in life. While some investors might not get that excited about the list, with these markets and stocks beaten down, there's a lot less to lose and a lot more to gain if their local economies keep trouncing the US on the growth track.

"Times are tough in Europe, where debt is high, tax revenue is low, unemployment is high, and market reforms don't seem to have much wind in their sails. But cast an eye toward nations just eastward, where a collection of local markets is on its final approach toward landing membership in the European Union. As a result, companies in such markets as Poland and Hungary are doing well. I advise you to look at Morgan Stanley's Eastern Europe Fund (RNE NYSE), as well as the Central European Equity Fund (CEENYSE). We would also note that Eastern Europe Fund is the easiest way to play Russia for the long-term. Despite the high risks, Russia remains one of the most important and exciting emerging markets in the world.

"In Asia, China is one of the champions of growth. After all, the nation is starting from such a low base that any change is big, meaning this market will continue to build and expand, drawing more and more capital into the local market. Exports keep flowing and capital keeps coming in. The easiest way to get exposure to a nice collection of companies is with Paul Matthews, manager of the Matthews China Fund (MCHFX ). In Latin American, my picks continue to be two closed-end funds--the Brazil Fund (BZF NYSE) and the Brazilian Equity Fund (BZL NYSE). Both are trading at discounts to net asset value and both remain on track to keep profiting from the ongoing reformations."

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