Fund Managers Bracing for a Sell-Off

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During past rallies from extreme sell-offs, markets peaked when 70% of stocks had traded above their 50-day moving average, or the average stock price over a 50-day period. That number is now near 90%, says James.

Investor sentiment has reversed from March lows as well. Then, the investor sentiment surveys James follows showed most shareholders to be bearish. Now less than 30% of investors say the market is due for a near-term fall. "That's never a good sign," says James. He expects a drop of at least 20% in the next few months and has cut his fund's stock position to 40%. He is putting money into sovereign debt from countries such as New Zealand and Australia that offer higher rates than do U.S. Treasuries. He also likes gold and silver producers, including Barrick Gold (ABX) and Silver Wheaton (SLW), which should benefit if the dollar continues to fall. The James Balanced Fund is up 5.91% this year, after being down 5.5% in 2008.

The Fundamentalist
JOHN LEKAS
Manager, Leader Short-Term Bond Fund
On Mar. 31, John Lekas, the Portland (Ore.) manager of the $205 million Leader Short-Term Bond Fund (LCCMX), predicted that the Dow Jones industrial average would hit 9,600. For clients whose money he manages outside of his fund, that meant a move into stocks. But when the Dow hit his target on Aug. 25, Lekas didn't like what he had seen. The market's rally was driven by sentiment, and the fundamentals hadn't improved enough to justify those gains, he says. There was still too much debt on corporate balance sheets, with around $2 trillion, or 65%, coming due in the next four years.

While refinancing most likely won't be a problem, he says, the new debt will be more expensive, so simply making interest payments will eat up more cash. Meanwhile, companies will find it difficult to boost revenue to make up the difference. To maintain profits, they'll need to lay off more workers. Lekas believes unemployment could hit 16% by the end of 2010. That poses a problem for the markets. "If you don't have real organic growth, you're not going anywhere," he says. By yearend, Lekas expects a Dow of 6,300, a 35% loss from today. He's dumped most of his equity positions in favor of cash, Treasuries, and short- term bonds. (He made a similar decision in January 2008, protecting his clients from much of that year's losses.) Only 10% of his clients' portfolios are in stocks.

The Stockpicker
SHAHREZA YUSOF
Head, U.S. Equities Aberdeen Asset Management
Aberdeen U.S. Equity fund (GXXAX) had a tough 2008—the large-cap growth fund lost 41%—and this year began with more of the same. "The world looked like it was going to end," says Shahreza Yusof, head of U.S. equities at the U.S. affiliate of global money manager Aberdeen Asset Management. "And there's no point investing in an end-of-world scenario." Instead, the fund held on to its financial stocks even as the crisis deepened. Top holdings (as of Aug. 31) such as Oracle (ORCL) and Philip Morris (PM) International helped it gain 29.9% this year.

Lately, Yusof has been lightening up on stocks that have had the largest gains since their 2009 lows. From June to Aug. 31, the fund cut back on shares of graphics-processor maker Nvidia (NVDA) by 37% and info tech provider Cognizant Technology Solutions (CTSH) by 27%. Yusof moved the money into stocks that have lagged the market, boosting positions in Kellogg (K) and medical-supply company Baxter International (BAX) by 50%.

Levisohn is a staff editor at BusinessWeek covering finance and personal finance.

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