With thousands of stocks trading on exchanges in the U.S. alone, trying to find the best prospects can feel like looking for a needle in a haystack. Even professional investors don't have time to do research on every single publicly traded company. To make their job more manageable, many investors narrow their focus on particular industries or investing styles to make their task simpler.
One strategy I've used to gather stock ideas for further research is to look at the portfolios of successful mutual fund managers. By seeing how these experienced investors have chosen to invest their customers' money, I'll almost always come up with stocks that are at least worthy of a closer look -- and often end up making a substantial profit both for me and the manager's mutual fund.
An example from a 40-year fund veteran
To show you how this strategy can work, I decided to look at one of the top-performing fund recommendations from our Motley Fool Champion Funds newsletter. Recommended nearly five years ago, the Leuthold Core Investment Fund (LCORX) has given Champion Funds subscribers a nice run of strong performance under adverse conditions, with a total return of nearly 69% during a period in which the S&P 500 actually lost money.
Even before the Fool's mutual fund newsletter selected Leuthold Core Investment, however, it had given shareholders a great ride. Over the past 10 years, the fund has returned an average of 8.4% annually, putting it in the top 1% of funds in its Morningstar category. Fund manager Steven Leuthold has led the fund since its inception in 1995 and has over 40 years of experience in money management.
Although the fund has been closed to new investors since 2006, it did agree to accept fresh capital from existing shareholders earlier this year. In partially reopening the fund, Leuthold said that "[t]he market turmoil over the last year has created very attractive investment prospects for investors."
Where Leuthold's putting his money
So how has Leuthold Core Investment done so well for its investors? One unusual aspect of the fund is its flexibility in changing its asset allocation to respond to market conditions. The fund's allocations can vary from 70% stocks and 30% bonds to 30% stocks and 70% bonds, and can go beyond those limits during unusual market conditions. The balanced nature of the fund has helped Leuthold outperform, especially during down markets.
The current environment, though, seems to qualify as an unusual market condition, as right now, the fund's asset allocation has about 73% in stocks versus 20% in bonds. Take a look at some of the fund's biggest stock holdings and how they've done recently:
|
Stock |
YTD Return |
5-Year Avg. Annual Return |
|---|---|---|
|
Oracle |
19.9% |
15.9% |
|
Dendreon |
413.8% |
26.1% |
|
Ventas |
14.1% |
13.2% |
|
Transocean |
63.2% |
24.1% |
|
IBM |
41.4% |
8.6% |
Source: Morningstar, Yahoo Finance. As of Aug. 6.
Now granted, Leuthold hasn't batted 1.000 with his picks. Bets in the airline sector, including Delta Air Lines
Lesser successes serve as a good reminder that you shouldn't just buy anyone's stock picks blindly; instead, do your own research to make sure you agree with a person's assessment and that they fit well in your portfolio.
Learn from the masters
With strong past performance, a fund manager at the helm with a long track record of success, and fees and costs that don't take too big a bite out of your returns, Leuthold is a good example of a fund you can get good ideas from. But it's not the only one. The nice thing about getting ideas from great fund managers is that there are plenty to choose from, and each can give you valuable insight into how to become a better investor.
Read about how wealthy investors are protecting their money from market volatility in this article from Champion Funds lead advisor Amanda Kish.
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