By Barbara Wall

Published: May 25, 2004

Time and again, investment advisers have preached the benefits of buying and holding core stock funds to help balance out market swings. With so many talented managers to choose from, is it worth adding racy specialist funds to the mix?

Core funds are selected for their low volatility and consistency. These funds are unlikely to dazzle when markets are rising, but neither should they disappoint when market sentiment sours.

High-profile managers with strong track records, such as Chris Rice, who heads the Cazenove European Fund, and Tim Russell, manager of Cazenove UK Growth & Income, are popular choices with multi-managers, who spread investments across a number of asset managers to reduce volatility.

They aim to add value by identifying the best portfolio managers and capturing their winning streaks.

Robert Burdett of Credit Suisse’s multi-manager team said that Russell is as good as it gets when it comes to selecting a generalist portfolio manager.

Tim has a good sense of market timing and believes each industry has its own cyclical characteristics, Burdett said. He is not afraid to hold cash, which has helped the fund in difficult market conditions.

Even the experts can have their off days, however.

Russell had a disappointing start to the year because he reduced portfolio exposure to cyclical stocks before they had finished their run. Given the current market uncertainty, Russell’s exposure to blue-chip companies with healthy balance sheets could serve the fund well this year.

Having lagged small and medium-sized companies by a significant margin in 2003, larger companies with defensive characteristics stand a better-than-even chance of outperforming in 2004, Burdett said.

Ben Yearsly, a fund analyst with Hargreaves Lansdown in London, said many investment portfolios would benefit by having a core fund for each market. His fund pick for Asia was First State Asia Pacific Leaders, managed by Angus Tulloch.

Tulloch is one of the most experienced and talented managers in this region, Yearsly said.

Recent performance has suffered slightly, but we remain confident of Tulloch’s capabilities.

Yearsly’s picks for Europe included Cazenove European and HSBC European Growth.

Rice, manager of the Cazenove fund, favors a defensive stance, focusing on companies with attractive valuations and solid earnings prospects. At the HSBC fund, Jeff Currington, the manager, still likes recovery plays in the industrial and cyclical services sectors.

Picking successful core funds for U.S. exposure is a little more tricky. Managers find it difficult to outperform the Standard & Poor’s 500-stock index.

Yearsly endorsed Legg Mason Value Trust, managed by Bill Miller. This is a focused fund with around 30 stocks, so it is liable to periods of short-term volatility.

But turnover is low, and the fund has distinguished itself as the only general equity offering to have outperformed the S&P 500 in each of the previous 12 calendar years.

Marcus Brookes, of Gartmore’s multi-manager team, based in London, favors BGI American growth for his core U.S. exposure.

The fund is managed by a team of analysts and is primarily invested in large companies.

BGI American Growth is not that far removed from an index fund, but active management gives it that extra edge.

Balanced funds, which can hold equities and bonds, are frequently promoted as candidates for the core portion of investment portfolios.

However, many people are concerned about the prospect for capital losses in bond funds this year, so caution is a watchword here.

I personally would not want any of my core funds to have fixed interest exposure at this point, Yearsly said.

Core funds might help investors sleep more easily, but it is the specialist funds that can help a portfolio shine. In highly volatile markets the flexibility that non-index-orientated managers have can be vital.

Last year it paid to move away from the index. Specialist commodities funds did well, as did many emerging markets funds. Will investors be rewarded for taking risks in 2004?

Many of the themes that dominated investment markets last year have played out, Brookes said. We are taking profits in Asia and moving away from the region, but we still believe European small-capitalization stocks have some way to go.

Brookes said he admired Richard Pease, manager of New Star European Growth, and Philip Wolstencroft, who runs Artemis European Growth.

Both managers have very different approaches to stock selection, Brookes said.

Richard knows the companies he invests in inside out and has a long-term investment approach. We take a lot of comfort from his experience and knowledge of the sector.

Philip never visits the companies he invests in, Brookes added. He has a system called Smart Garp, which highlights stocks from analysts’ reports that are extremely undervalued.