Personal Business: INVESTING
SHORT ON RISK, LONG ON RETURNS
Can you construct a portfolio that earns twice the 5% annual yield of a money market fund without exposing yourself to huge extra amounts of risk? You bet. Drawing on the vast universe of mutual funds, and with some help from the CD-ROM version of the Value Line Mutual Fund Survey, we've constructed just such a portfolio and labeled it "Supercash."
It's based on a mix of funds that have the potential to deliver a return higher than money funds with far less volatility than a stock or bond fund (table). Had you invested in these funds at the beginning of 1989 and reinvested all your dividends and distributions, you would have earned a 10% average annual return. Indeed, if you worry about volatility in your investments, you should be comfortable with this mix. The standard deviation of returns is 3.5%: Two-thirds of the time, the portfolio's return was in the range of 3.5 percentage points above and 3.5 points below the average of 10%. A Standard & Poor's 500 index fund would have earned nearly 18%, but the standard deviation would have been much greater--about 12%.
Consider these criteria when searching for funds for a Supercash portfolio:
-- Each fund should have different investment characteristics from others in the group. In our portfolio, there's Strong Advantage Fund, an ultrashort bond fund, and Vanguard Fixed Income GNMA Portfolio, an intermediate-term government bond fund. SoGen International is a hybrid, a mix of global stocks and bonds, while Lindner Dividend focuses on domestic securities producing current income. Both equity funds zoom in on less volatile "value" stocks rather than go-go growth companies. None of the funds has a sales load except for SoGen (maximum 3.75%), and that can be avoided if you buy through a financial adviser. All have low management fees. This data can be gleaned from a variety of sources, including the Interactive Mutual Fund Scoreboard at Business Week Online (www.businessweek.com).
-- The stock funds held shouldn't mimic the S&P 500. The Lindner and SoGen funds have a "beta"--a widely used measure of market correlation--of 0.34 and 0.39, respectively. Thus, if the S&P were up or down 1%, Lindner should be up or down 0.34% and SoGen, 0.39%.
-- Each fund should also have relatively low risk. The BUSINESS WEEK Scoreboard categorizes Vanguard GNMA as low-risk; the others, very low.
-- The funds should have good risk/return ratios. The longer the record, the better. All four funds have histories of more than 10 years.
In designing the Supercash portfolio, we put 30% each into the income-oriented Strong and Vanguard funds and 20% each into the equity-leaning Lindner and SoGen funds. In the 99 12-month periods examined, only one showed a negative average monthly return for the portfolio--a mere minus 0.02%. There have been some shorter-term losses: In March, 1994, all four funds fell and the group showed a -1.62% return. But Supercash works because of the complementary traits of its components. Usually, when one or two of the funds have a losing month, the average is picked up by the other funds. GNMAs took a big hit in January, 1992, and sent the Vanguard fund down by 1.92%. However. Supercash showed a better-than-average monthly return of 0.84%. Such returns make Supercash "a prudent, sleep-at-night-and-still-do-better-than-bonds portfolio," says Robert Gavrich, who runs a San Francisco investment advisory firm, Seasonal Strategy. With careful spadework and willingness to accept a bit more risk, you can beat the money funds and remain conservative.Stanley W. AngristReturn to top
The "Supercash" Portfolio
By combining various low-risk funds with distinctly different investment
practices, it's possible to design a portfolio with less risk than an
all-stock or all-bond portfolio, but greater returns than a risk-free
FUND CATEGORY CATION RETURN* RISK** BETA***
STRONG ADVANTAGE ULTRASHORT BOND 30% 7.4% 0.5% 0.04%
VANGUARD F/I GNMA INTERM. GOVT. 30 9.4 3.3 0.81
LINDNER DIVIDEND DOMESTIC HYBRID 20 12.4 6.1 0.34
SOGEN INTERNATIONAL INT'L. HYBRID 20 12.3 6.0 0.39
TOTAL PORTFOLIO 100 10.0 3.5 NA
* Average annual; Jan. 1989-Feb. 1998
** Variability of return as measured by standard deviation
*** Strong and Vanguard funds calculated vs. the Lehman Bros. Aggregate Bond
Index; Lindner and SoGen calculated vs. the S&P 500 NA=Not available
DATA: VALUE LINE MUTUAL FUND SURVEY, INVESTORS FASTTRACK, BUSINESS WEEK
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