The stock market has perked up nicely of late, but contrarian that I am -- and given all the volatility we've experienced this summer -- I think savvy investors ought to at least contemplate whether or not we're in the midst of a bear market rally. That's particularly true when a talented and proven team of money managers has assessed the situation and decided that now's an exceedingly good time to be ... cautious.
Dialing down risk
As reported in this earlier commentary, the merry band of data mavens at the Leuthold fund shop thinks there's a possibility that "a significant economic slowdown, or possibly a recession, could become increasingly obvious by the second half of 2006."
Now normally, as I do my homework for the Fool's Champion Funds newsletter service, I don't put much stock in market prognostications. These guys, however, have a habit of getting it right -- and of going where the data lead them. Not coincidentally, they became extremely cautious earlier this year, significantly ratcheting down the equity stake of the now-closed LeutholdCore Investment (LCORX), a "hybrid" fund with a well-diversified portfolio that recently included such top stock holdings as BHP Billiton (NYSE:BHP) and Oneok (NYSE:OKE). The fund's lineup includes mining titans Inco (NYSE:N) and Alcan (NYSE:AL) as well.
As the management team put it in a recent letter to investors, "We believe it is a time to be conservative ... not aggressive. Indeed, as of their most recent quarterly report (links to PDF), the fund's net equity exposure stood at just 31%.
Contrarian's corner
Conservative, of course, is in the eye of the shareholder. Reducing your stock stake is one way of getting that job done, but so, too, is favoring less volatile investments. One option: mutual funds that favor the kinds of stocks trendy types -- you know, the ones who inflated the market bubble during the late 1990s only to watch it burst in early 2000 -- typically avoid.
That means tilting toward prospects with the best relative valuations -- stocks that have less room to fall when the market heads south and greater upside potential when Mr. Market turns cautious. Indeed, a manager at one of our newsletter recommendations made out like a proverbial bandit in the post-bubble era, racking up a gain of more than 75% between March 2000 and December 2002 while the S&P shed some 33% of its value over that stretch of time.
Impressive, yes? And what's more, unlike Leuthold Core Investment, this fund -- which currently has significant sums plunked down on such market stalwarts as Microsoft (NASDAQ:MSFT), AstraZeneca (NYSE:AZN), and Anheuser-Busch (NYSE:BUD) -- remains wide open to new money. (For those of you who want to learn more, it was my July 2005 recommendation.)
The Foolish bottom line
Make no mistake: I think the key to being a successful long-term investor is designing a well-diversified asset-allocation game plan that suits your timeline and tolerance for risk and sticking to it over the course of many years. That said, it is possible to be intelligently opportunistic along the way -- and a top-notch fund that specializes in out-of-favor stocks is a great way to do just that.
With that in mind, if you'd like to sneak a peek at this contrarian pick -- not to mention all the others we've recommended since Champion Funds first opened for business -- you're in luck: A free guest pass is just a mouse-click away. Your pass provides access to our back-issue archives, model portfolios, and complete list of recommended funds.
Our members-only discussion boards come gratis, too, so click here to snag your pass and peruse a service designed to help you beat the market with mutual funds -- no matter which way the economic wind blows.
This article was originally published on May 16, 2006. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service, and at the time of publication didn't own any of the securities mentioned above. Leuthold Core Investment is a Champion Funds recommendation. Microsoft and Anheuser-Busch are Inside Value recommendations. Oneok is an Income Investor pick. You can check out the Fool's strict disclosure policy by clicking righthere.
