Preserving your portfolio: our panel of expert money managers shows you how to make sure your earnings from the current market rebound don’t get washed away

Preserving your portfolio: our panel of expert money managers shows you how to make sure your earnings from the current market rebound don’t get washed away

IT SEEMS ALMOST EVERYONE HAS BENEFITED FROM THE LONG-AWAITED RECOVERY THAT PROPELLED THE ADVANCE OF THE FINANCIAL MARKETS IN 2003. THE 28.28% RETURNS LOGGED BY THE DOW JONES INDUSTRIAL AVERAGE AND THE 50.01% RETURNS OF THE NASDAQ MARKET INDEX REMINDED US OF THE DOUBLE-DIGIT GAINS THAT MANY PEOPLE BECAME ACCUSTOMED TO DURING THE GO-GO ’90S. But if you were lucky enough to recover some of what you lost during the last three years of less-than-stellar market performance, what do you do now to preserve it?

We assembled four top-flight money managers to evaluate the current market rebound and provide strategies investors can use to protect their principal while outperforming the markets in 2004. The members of our roundtable included Stephen Coleman, chief investment officer at Daedalus Capital, a 10-year-old, St. Louis-based investment firm that manages $40 million in equity-only portfolios; Valerie Mosley Diamond, fixed-income portfolio manager with Boston-based Wellington Management Co., who oversees a $9 billion portfolio within Wellington’s $330 billion in assets; Drake Craig, principal at 2-year-old Atlanta Life Investment Advisors, (the investment arm of Atlanta Life Financial Group Inc., ranked No. 3 on the BE INSURANCE COMPANIES list with $99.9 million in assets) which manages about $58 million in assets in a large-cap core, and an international portfolio; and Derek Batts, chief investment officer and president of Detroit-based Union Heritage, which manages a large-cap value portfolio of about $250 million for several institutional clients.

BLACK ENTERPRISE: What is your market outlook for 2004?

COLEMAN: As I look out the next three to five years, I think that the world is going to be very, very good for equity investors. If pressed, I would say that between now and the election, it should be very smooth.

CRAIG: In terms of my outlook for 2004, it’s an election year and, generally, that spells good things. I think economically, we will see pretty strong growth because GDP numbers are attractive and inflation numbers are low.

BATTS: For 2004, we’re cautiously optimistic. We believe that some of the elements are in place for continued growth. Business investment is starting to pickup; we look at the competitive nature of the dollar and how it’s driving exports, and inflation seems under control. So we are cautiously optimistic.

DIAMOND: In terms of outlook, our view is that equity should do fine. Corporate bonds will do particularly well. High yield bonds, I think, will do well. I must point out however, that for the last 20 years we’ve been in a steady decline of interest rates. And looking out, we are going to see the mirror image of that trend so, as interest rates rise, I would not be in U.S. Treasury Bonds, going forward.

B.E.: Are we in a bull market that will be sustained or are we likely to see continued market volatility during 2004?

CRAIG: We’ve gone through a profits recession over the last couple of years. Companies have been put in a position where they have had to wring out excesses. I think the type of earnings growth that we are likely to see over the next couple of years, should help sustain a market advance.

BATTS: I would agree with that assessment and add that I think there are some structural changes [to the economy] that are going on that we are going to have to address. The impact of the administration’s stimulus package, in the short term, unquestionably had some benefit in the third quarter of 2003. But the real question that we have to determine is, Can the administration promise a guaranteed Social Security benefit, Medicare, tax cuts, corporate subsidies, No Child Left Behind, improved education, and still cut the federal deficit? There are some inconsistent policies put forward, and I think that we are going to have to deal with that.

But, having said that, we are seeing that companies continue to accelerate their earnings momentum so we have reason to expect that, in 2004, the rally will expand to some of the higher quality companies this year.

DIAMOND: I wanted to point out that there is a risk to all of the rosy outlooks that we’ve just described. I’m very confident there is going to be a pickup in business investment, but I’m not as confident on the strength of the consumer because it has been driven by a lot of tax stimulus. The tax stimulus that is coining the first half of this year is about $42 billion, so, again, we’re going to get more artificial stimulation, which makes the consumer feel really good about him or herself. When that goes away, which will be in the first half of 2004, the consumer may, in fact, falter unless there is real improvement in the employment sector. Markets are going to be at risk because companies have already gotten very lean and mean. How much more can they cut?

B.E.: What signs should an investor look for that will indicate whether this market has legs to continue or whether it might be slipping back into a recession?

BATTS: As an investor, I would continue to look at business investment and manufacturing–are there increases in capacity utilization? What effect would a rise in rates have going forward? We still believe in the equity markets as places to go but there are defensive sectors. For example, you look at healthcare. You look at staples. During periods of rising rates, you might find investors beginning to go there and realize some value.

COLEMAN: We’re not focusing on whether we’re in a bear market or a bull market. What we are trying to do is exploit valuation aberrations–we have chosen to concentrate our portfolios in areas that are, in some way, related to telecommunications, broadband, and wireless, because those are areas where the entire sector got blown up. We’re talking 90% declines and higher. In the case of Nortel, an $87 stock became 43 cents. When you see that sort of aberration, you ask yourself, “OK. Now that the panic is behind us, what is the right price for a company like Nortel?”

DIAMOND: I would advise individuals that things are going to get better. If they think about a typical asset allocation of roughly 60% equity, 40% bonds, [I would] reduce the allocation of bonds, in general, because interest rates are likely to go up. I would increase my allocation to equity because of the positive. fundamental backdrop [to the economy]. But, I would make sure that I put money into various mutual funds, steadily, instead of buying in a lump sum and holding.

B.E.: Any particular type of mutual funds?

DIAMOND: I’ll tell you what I did for myself and for my three kids. I have 60% in Vanguard’s S&P Index Fund, so the core of my equity composite is in the Standard & Poor’s Index. Then, I play on the margin. I’d place 15% in an international equity fund, because I think growth is going to be much stronger outside of the U.S. than inside. Then I’d put 15% in technology funds because I think that there is going to be a huge pickup going forward, globally, on business investment and that area is going to be attractive. And then I balance things out with a high-yield bond fund. That’s what I’ve done for each one of my kids because they have a long time horizon.

B.E.: Is it a good idea for investors to do the due diligence and choose strong individual stocks as opposed to going into mutual funds?

COLEMAN: We succeed, as investors, by identifying companies that we believe in, and the litmus test for whether it’s worthy of us is generally on the consumption side. Do we consume, in one way or another, this product or service and are we satisfied? That is the first connect. Any individual has that experience, whether you are consuming Starbuck’s coffee and, therefore, like the company or you like to shop at Wal-Mart. You like Microsoft software because it makes you more productive. There are things that touch our lives and they tend to be publicly traded companies, so we identify them. Hopefully, you can do the kind of analysis that gets you to that point of comfort with a company–then it’s really about waiting. You find a good idea and you wait. Anheuser-Busch is a company that has been delivering about 15% compounded, to its investors, for about 40 years. Well, 15% compounded for five years doubles your money. For 10 years, it gives you four to one. Well, if you consume that product and you like it, then it’s a smart thing to buy the stock and let it be. So much of succeeding in investing is about being patient. It’s about making a very good decision and then watching it work, letting time create the value for you.

CRAIG: The Internet allows you to have access to pretty much the same type of data that professional investors have. You can research your own stocks, but it takes a lot of time. For those who do not want to devote the time and energy to structure their own portfolios, Exchange Traded Funds are available. Index funds are also a way that you can kind of avoid a lot of the scandal-plagued funds that have been in the headlines recently. For those investors who have big retirement assets in funds, you can put them in ETFs pretty easily, without any

major costs. ETFs trade like stocks. There are some disadvantages in that you pay a broker’s commission so they are better for lump sum distributions, as opposed to dollar cost averaging; but, because they are passively traded, you can pretty much gain exposure to any sector and the expense ratios (fees) are very low. They are also very tax efficient.

BATTS: Going back to what you were asking about the mutual funds, I think you have to classify people into maybe two different categories–those who may want to invest on their own and those who would invest through a vehicle, like a mutual fund. For the individual who would like to invest on his own, I believe that, as Warren Buffett cautions, if someone knew that they could make only 10 investments in their life, they would take the care to research, and to understand what it is that they are buying. And I think that they would probably, once doing that research, be able to have the patience to see it come to fruition. If they can only make a few selections, why would they choose this stock over the rest of the stocks in the universe?

B.E.: Are you suggesting that consumers should use that same approach to pick a mutual fund now?

BATTS: No. In terms of an individual investment, I think they should select stocks as if they only had a limited number of picks so that they would do that research. For investors who may be inclined to look at a fund, there are several things that they should take a look at. They should take a look at expense ratios. They need to take the time to read the disclosure statements, to understand what the trading policy is, especially with respect to late-day trading–particularly in international funds, which have been in the news lately. Does the fund have a policy to monitor trading within their fund? Some funds have policies that once you go into the fund, you cannot exit the fund without a substantial disincentive. But, at the end of the day, I think they also want to take a look at, obviously, the performance, and not the performance in 2003. If it’s an equity fund, they want to take a look at how the fund has performed in a bear market as well as how it has performed in a bull market; to take a look at its three-, five-, and 10-year record.

B.E.: What should an investor look for when they want to get out of a fund?

BATTS: I think they should assess that downside risk [of the fund] and, if a fund goes below whatever their threshold is–if it goes down 25%, 30%, or whatever they set as their personal threshold–I think that would be one trigger [to get out]. If they lose confidence in the manager or the fund or the market altogether, they can use that to execute their sell strategy.

CRAIG: It’s important that investors know what they are getting. Investors shouldn’t go out and buy an aggressive growth fund and think that if it doesn’t return 30-plus percent returns because growth goes out of favor, that somehow that manager is no longer appropriate for that particular allocation. I think the most important decision is, How much are you going to allocate to growth, how much are you going to allocate to value, small cap, international, fixed income? Generally speaking, the allocation is the most important decision, and you need to feel comfortable that the fund is following the guidelines that are appropriate for what you are trying to accomplish. In terms of fees, there are enough alternative funds to choose from, so that you don’t have to pay a lot for a mutual fund to get good performance.

B.E.: Any last words of advice for investors?

DIAMOND: If they have an allocation now that is very high in bonds, investors should take it down and increase equities. They should also consider being willing to take a certain percentage of their money to use as education and invest it in some of the stocks that my colleagues have mentioned, in an attempt to learn.

BATTS: In wrapping up, I would emphasize discipline, as it applies to their lives, in terms of their budgeting, a certain amount [of money] that they are going to invest. There are many vehicles out there where you can be very passive [about investing] or you can be as involved as you want to be. But it’s also important to take a longer-term approach and to understand that there is some volatility in the market. There is some downside risk, but over a longer period of time, with patience and discipline, they will be rewarded for their efforts.

CRAIG: Don’t allow the corporate malfeasance and the mutual fund scandals that are in the headlines today to keep you from investing. Obviously, you have to be more aware of where you invest, but there is a tremendous opportunity over the next couple of years. Over the longer term, I think investing in the financial markets is a must as you plan for your retirement and your kids’ education. The biggest decision that you have to make is the allocations to the various asset classes, and don’t be afraid to seek professional advice when you make those decisions.

COLEMAN: If you are trying to grow your money at a rate above 10%, then the stock market is the place to be. Time is your best ally. If you can just own a great idea for a decade, you will never be deluded again. Just buy a really great company and keep it for a decade, and you will be amazed at how all the crowd noise disappears and all of your fear goes away.

VALERIE MOSLEY DIAMOND WELLINGTON MANAGEMENT CO.

Price at 3-Year

Fund (Ticker) Recommendation Annualized Return

Vanguard High-Yield Fund (VWEHX) $6.45 5.49%

Select Sector SPDR Financial (XLF) 28.79 2.34

Select Sector SPDR Technology (XLK) 21.35 -13.01

THE PICKS

Vanguard High-Yield Fund (VWEHX): I am reluctant to name individual bonds, but this mutual fund gives investors exposure to corporate bonds in a real accessible way.

Select Sector SPDR Fund (XLF): This Exchange Traded Fund (ETF) works the banking sector. If the yield curve continues to go high, banks could do quite well because they are still taking in money at very low rates and lending money at very high rates. Regional banks that have strong franchises are at risk of being gobbled up.

Select Sector SPDR Technology (XLK): This ETF is like getting a basket of stocks in the sector of technology. I think there is going to be an ongoing demand for that commodity.

DRAKE CRAIG ATLANTA LIFE INVESTMENT ADVISOR

Price at 36-Month

Company (Exchange: Ticker) Recommendation * Price Target

UTstarcom (Nasdaq: UTSI) $34.71 $53.00

Legg Mason (NYSE: LM) 86.42 126.00

Pfizer (NYSE: PFE) 35.85 60.00

* AS OF JAN 28, 2004

THE PICKS

UTStarcom: They nave the best play or emerging market telecommunication infrastructure. They’ve taken an obsolete. Japanese digital wireless phone system, with very limited range, and sold it to Chinese telecommunication companies. This U.S.-based company is uniquely positioned to capitalize on the growth in the Asian markets.

Legg Mason: They made some acquisitions, so their actual growth in assets has been in excess of 20%. They will also benefit from increased merger and acquisition activity and investment banking activity as the environment heats up, making them ideally positioned to grow,

Pfizer; Valuations for large-cap pharmaceuticals are beginning to look attractive. While I can’t say that the drug pipeline for Pfizer is great, they are a leader. They should see 20% growth over the next year, and men maybe 13% earnings growth in 2005.

DEREK BATTS UNION HERITAGE

Price at 36-Month

Company (Exchange: Ticker) Recommendation Price Target

Abbott Laboratories (NYSE: ABT) $43.80 $66.00

Kellogg (NYSE: K) 38.00 63.00

Fannie Mae Corp. (NYSE: FNM) 76.46 107.00

* AS OF JAN 28, 2004

THE PICKS

Abbott Laboratories: It has a projected return of 27% to the shareholders. If you look at the number of drugs that are coming off patent within the next three years, Abbott is favorably ranked amongst its peers. We believe this company is undervalued.

Kellogg: It’s returning about 32% to its shareholders. We like Kellogg as a staple–regardless of event risk and political risk, people are still going to eat cereal. Fundamentally, we believe that this is a defensive play with a company that has been significantly undervalued for a period.

Fannie Mae Corp.: Fannie Mae buys mortgages from banks. It has a projected return on equity of about 20%. We believe it is an important vehicle that provides liquidity in this market. We are confident in Franklin Raines and his hedging strategy and believe this company is positioned, regardless of rates, to continue growing.

STEPHEN COLEMAN DAEDALUS CAPITAL L.L.C.

Price at 36-Month

Company (Exchange: Ticker) Recommendation * Price Target

Nortel Networks (NYSE: NT) $6.46 $20.00

Charter Communications (Nasdaq: CHTR) 4.78 13.00

Wireless Facilities (Nasdaq: WFII) 14.80 40.00

* AS OF JAN. 28, 2004

THE PICKS

Nortel: I like Nortel because the core of its business–about 45% right now–is the wireless area, infrastructure, and equipment. It’s mobile phones today, but, ultimately, the entire Internet is a wireless phenomenon: high speed, broadband, etc. I see Nortel as a leader there.

Charter Communications: Because it was expected to have been abandoned by Paul Allen, one of the wealthiest men in the world, the stock price plummeted. We think it should be right between $13 and $15 a share. It’s a cable company with a thriving broadband business.

Wireless Facilities: It was $40. In 60 days, it fell to $3.50. Metricom, one of its customers, went bankrupt and wrote off $13.6 million. Wireless Facilities is in the business of designing, constructing, and managing wireless infrastructure. It built a lot of Verizon’s backbone on the wireless side. Within six months of identifying a problem, they were profitable again. I see Wireless Facilities, three to five years out, at 40 bucks.

LAST YEAR’S PICKS

Recent Prize at

Company (Exchange: Ticker) Prize Recommendation *

MICHAEL SMITH

PROFOCUS INC.

eBay Inc. (Nasdaq: EBAY) $69.35 $37.64

Health Mgt. Assoc. (NYSE: HMA) $24.28 $18.34

Royce Special Equity (RYSEX) $18.22 $13.64

Portfolio Performance 50.07% Current Value of $3,000 Investment

$4,502.13

DALE BRYANT

THE BRYANT

GROUP

Watson Pharmaceuticals (NYSE: WPI) $47.49 $29.67

Dollar Tree Stores (Nasdaq: DLTR) $32.00 $22.70

Golden West Financial (NYSE: GDW) $103.10 $72.97

Portfolio Performance 47.44% Current Value of $3,000 Investment

$4,423.21

CHERYL CREUZOT

WEALTH DEVELOPMENT

STRATEGIES L.P.

Bramwell Growth (BRGRX) $19.56 $15.19 ***

Ameristock (AMSTX) $40.45 $31.22 ***

Navellier Mid-Cap Growth (NPMDX) $23.37 $16.50 ***

Janus Mid-Cap Value (JMCVX) *** $21.06 $13.98 ***

Ariel (ARGFX) $47.17 $32.55 ***

20th Century Int’l Growth (TWIEX) $8.27 $5.98 ***

Strong Government Securities (STVSX) $10.97 $10.60 ***

Columbia High-Yield (CMHYX) $8.72 $7.90 ***

Portfolio Performance 30.96% Current Value of $8,000 Investment

$10,476.90

PIERRE DUNAGAN

THE DUNAGAN

GROUP

Dell Computer (Nasdaq: DELL) $34.43 $24.38

Walgreen Co. (NYSE: WAG) $34.86 $30.27

Harley-Davidson (NYSE: HDI) $48.08 $41.47

Portfolio Performance 24.11% Current Value of $3,000 Investment

$3,723.25

WALT CLARK

CLARK CAPITAL

FINANCIAL

SBC Communications (NYSE: SBC) $26.42 $24.54

J.P. Morgan Chase & Co. (NYSE: JPM) $39.60 $23.81

Southwest Airlines (NYSE: LUV) $15.71 $12.03

Portfolio Performance 31.55% Current Value of $3,000 Investment

$3,946.39

KATHLEEN WILLIAMS

WILLIAMS FINANCIAL

SERVICES GROUP

Clipper (CFIMX) $90.05 $74.48

American Century Target Mat $68.65 $64.25

2015 Inv (BTFTX)

Jensen (JENSX) $23.56 $19.26

Portfolio Performance 16.69% Current Value of $3,500.79

Current Value

Total of $1,000

Company (Exchange: Ticker) Return ** Investment

MICHAEL SMITH

PROFOCUS INC.

eBay Inc. (Nasdaq: EBAY) 84.25% $1,842.45

Health Mgt. Assoc. (NYSE: HMA) 32.39% $1,323.90

Royce Special Equity (RYSEX) 33.58% $1,335.78

Portfolio Performance 50.07% Current Value of $3,000 Investment

$4,502.13

DALE BRYANT

THE BRYANT

GROUP

Watson Pharmaceuticals (NYSE: WPI) 60.06% $1,600.61

Dollar Tree Stores (Nasdaq: DLTR) 40.97% $1,409.69

Golden West Financial (NYSE: GDW) 41.29% $1,412.91

Portfolio Performance 47.44% Current Value of $3,000 Investment

$4,423.21

CHERYL CREUZOT

WEALTH DEVELOPMENT

STRATEGIES L.P.

Bramwell Growth (BRGRX) 28.77% $1,287.70

Ameristock (AMSTX) 29.56% $1,295.60

Navellier Mid-Cap Growth (NPMDX) 41.64% $1,416.40

Janus Mid-Cap Value (JMCVX) *** 50.64% $1,506.40

Ariel (ARGFX) 44.92% $1,449.20

20th Century Int’l Growth (TWIEX) 38.29% $1,382.90

Strong Government Securities (STVSX) 3.49% $1,034.90

Columbia High-Yield (CMHYX) 10.38% $1,103.80

Portfolio Performance 30.96% Current Value of $8,000 Investment

$10,476.90

PIERRE DUNAGAN

THE DUNAGAN

GROUP

Dell Computer (Nasdaq: DELL) 41.22% $1,412.20

Walgreen Co. (NYSE: WAG) 15.16% $1,151.60

Harley-Davidson (NYSE: HDI) 15.94% $1,159.40

Portfolio Performance 24.11% Current Value of $3,000 Investment

$3,723.25

WALT CLARK

CLARK CAPITAL

FINANCIAL

SBC Communications (NYSE: SBC) 7.66% $1,076.61

J.P. Morgan Chase & Co. (NYSE: JPM) 66.32% $1,663.17

Southwest Airlines (NYSE: LUV) 20.66% $1,206.61

Portfolio Performance 31.55% Current Value of $3,000 Investment

$3,946.39

KATHLEEN WILLIAMS

WILLIAMS FINANCIAL

SERVICES GROUP

Clipper (CFIMX) 20.90% $1,209.05

American Century Target Mat 2015 6.85% $1,068.48

Inv (BTFTX)

Jensen (JENSX) 22.33% $1,223.26

Portfolio Performance 16.69% Current Value of $3,500.79

SOURCE: YAHOO! FINANCE * AS OF JAN 24, 2003. ** TOTAL RETURN REFLECTS

STOCK APPRECIATION AND INCLUDES STOCK SPLITS AND DIVIDENDS *** AS OF

FEB. 7, 2003 **** ORIGINALLY BERGER MID-CAP GROWTH FUND, ABSORBED BY

JANUS

COPYRIGHT 2004 Earl G. Graves Publishing Co., Inc.

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