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By Gary D. Halbert
March 23, 2004


1.  Investment Markets Are More Challenging This Year.

2.  Trading Range Markets Not Good News For Investors.

3.  Professional Money Managers Can Be The Answer.

4.  Really Successful Managers Are Few & Far Between.

5.  How To Get The Top Pros On Your Investment Team.


Since I began writing this weekly E-Letter in late 2002, I have consistently advised that most investors would be better served to use professional money managers to oversee their stock and bond investments.  During that same time, I have repeatedly recommended several specific money managers, and all handsomely outperformed their respective market averages in 2003.  To see the actual performance of the Advisors I have recommended, CLICK HERE.  

Now we find ourselves in a different market environment from last year.  Stocks look to be in a broad trading range, generally speaking, and sharp declines such as we’ve seen this month could happen more frequently.  Bonds have enjoyed a nice run so far this year, but here too we could see some nasty declines if interest rates turn higher (and they will at some point).

In such an environment of uncertainty and fickle markets, it is especially important to consider so-called “ACTIVE” money managers – those who can “hedge” their market positions, or reduce positions significantly, or even get out of the market altogether if need be – as opposed to managers who are always 100% invested no matter what. 

The problem is, there are not that many really successful “active” money managers.  Don’t get me wrong, there are plenty of active money managers out there – hundreds, in fact – but not many have delivered superior results.  The most successful active managers are hard to find, generally speaking, and most investors never hear about them.  This week, I’ll tell you why.    

But first, let’s quickly review the market outlook and remind ourselves why we need active management in the current environment.

Where Stock Prices Are Headed In 2004

Following one of the best years ever in 2003, stock prices have struggled so far this year.  “Struggled” might not be the appropriate description, however, since equity prices have tumbled in recent weeks.  As this is written, the Dow Jones, the S&P 500 and the Nasdaq are all below where they were at the end of last year.  Not surprisingly, the latest market selloff has analysts and investors alike wondering if 2003 was just an aberration after three straight years of stock market declines (2000-2002), or if the latest decline in equity price is only temporary.

My view (and that of my best sources) continues to be that stock prices will move in broad trading ranges with a slight upward bias this year.  There is, of course, the chance that equity prices will surprise on the upside again in 2004, given that this is a presidential election year, but I would not count on it.  Either way, I expect equity prices in general to be higher by the end of the year, but I do not see a repeat of the lofty returns we enjoyed in 2003. 

For the time being, we are in trading range markets.  This is not what investors want to hear.  Broad trading ranges are not fun for most investors.  In trading range markets, stock prices can move higher, sometimes for weeks in a row, only to give back most (or all) of the gains in a very short period of time, often for no apparent reason.  About the time some investors decide to jump in, the bottom falls out, as we have seen recently.  Trading range markets are often a recipe for disaster for many investors.

Use Professionals That Have A “System”

As noted above, I believe that most investors should use professional Investment Advisors to manage their stock market investments, rather than trying to pick stocks and mutual funds on their own.  This is particularly important in a trading range environment such as I see for the months ahead.  In a year like 2003 when the market averages rose 25-30% or more, timing isn’t so important.  But in a trading range market, timing can be critical.

In a trading range market, you need a “system” or a methodology for dealing with the ups and downs.  You need to have a specific set of criteria that dictate whether you are fully invested, partially invested or sitting in the safety of a money market fund on occasion.  Most investors have no such system to guide them and usually end up making decisions based on emotions and/or what they hear from the talking heads on cable TV.

The successful professionals I recommend have highly developed systems and methodologies that they use to make their investment decisions.  Over the years, they have designed and refined these systems to give them specific indications (signals) when they should be fully invested and when they should be in more defensive positions.  Emotion never comes into play.

Fund Selection Is Critical

Mutual fund selection is always important but particularly so in a trading range market.  As you know, there are thousands of stock funds and bond funds out there.  Even in strongly trending markets like we had last year, some funds significantly outperform others.  In a trading range market, we’re talking about more than one fund outperforming another by a few percentage points; in fact, good fund selection can mean the difference between profits and losses.

Let me again refer back to the Advisors I have recommended in the last year.   As noted above, all of the Advisors I recommended significantly outperformed their respective market averages in 2003. ( CLICK HERE for the numbers.)  Equally important, the stock fund Advisors I have recommended are profitable so far this year, even though the equity market averages are down this year.  How do they do this?

In addition to having time-tested systems and methodologies as discussed above, these Advisors have sophisticated programs for mutual fund selection.   Not that they’re perfect by any means, but these Advisors have a history of selecting different types of mutual funds for different market environments.  The fact that they are profitable in 2004, when the major market averages are down, is very much a function of mutual fund selection.

Most investors do not have the sophisticated software to analyze, evaluate and compare thousands of mutual funds to see which ones have historically outperformed others in various types of market conditions.  This is another reason why I recommend that most investors use professionals to manage at least a part of their stock and bond portfolios.

“Hedging” Their Positions

Over the last ten years or so, we have seen the development of several mutual funds that are designed to “short” the market; that is, if the market goes down, these funds go up in value (and vice versa).  The first of these so-called “bear funds” or “short funds” was the Rydex Ursa Fund which opened in 1994.  Since then, several other fund families have created similar funds that move up when the market moves down. 

In recent years, more and more professional Advisors have begun to use these short funds as a way to “hedge” their other mutual fund positions during market declines.  If their systems indicate that market risks have risen to intolerable levels, or that a significant decline may be unfolding, they can buy one of the short funds as a way to partially or fully hedge their positions.

In this way, the Advisor can maintain its long positions in mutual funds and hedge them (partially or fully) against a decline in the market.  They can then exit the short fund(s) whenever their system indicates that the risk of decline has passed.  All of the short funds, by the way, welcome this kind of trading, short-term or otherwise.

For all the reasons noted above and others, I recommend that most investors use these active professional money managers for at least part of their stock and bond portfolios.  In my own case, virtually all of my personal investment portfolio is with active managers of one type or another.

A Few Good Men (Or Women)

As indicated earlier, there are hundreds of active money managers around the country.  Unfortunately, not many of them are really successful.  At my company, we monitor the results of hundreds of active managers on an ongoing basis.  We subscribe to the expensive services and databases where active (and other) money managers report their performance.  We are constantly looking for new managers with successful results.

The problem is, out of the hundreds of managers we follow, only a handful have been really successful.  Like many other things in life, there are lots of active managers that aren’t very good, some who are mediocre and only a select few that are really successful.  In fact, out of the hundreds of active managers we have looked at over the years, we have only recommended about a half dozen to our clients.

We have a strict “due diligence” process we go through whenever we get serious about a new Advisor.  When we find an Advisor that looks interesting, we have them send us all their information which we peruse carefully.  If we are still interested, a series of phone calls follows with a litany of questions.  If that goes well, we typically have the Advisor provide us copies of actual customer account statements as a first step in verifying that the performance reported is real.  (If they refuse to provide such documentation, they are history!)

If everything checks out to that point, we then arrange for an onsite due diligence visit to their operation, wherever that might be.  (Very few individual investors would go to this expense.)  Once in their office, we meet all the principals and key employees, review their trading systems and methodologies further, check out their administrative and customer service capabilities, review additional customer account statements to verify performance, etc., etc.

If, and only if, the Advisor meets all of our stringent due diligence requirements will we recommend them to our clients.  As noted above, only a handful of Advisors – out of hundreds we’ve looked at – have actually made it onto our recommended list.

Opening Customer Accounts

When we decide to recommend a new Advisor, we prepare our own Special Report about the Advisor and its services.  The report includes details about the Advisor, its background, its investment systems and methodologies, the results of our due diligence visit and, of course, complete performance information.  We send our Special Report, along with the Advisor’s own materials, to our clients all across the country.

Each Advisor we recommend has a custodial relationship with either a mutual fund family, discount broker or an independent trust company where customer accounts are held.  When clients decide to invest, we send them the account applications to establish their own individual account(s) at the appropriate custodian.  Clients return the applications along with a check payable to the custodian (not us) to fund the account(s).  We make copies of everything for our files and overnight the original forms and the check to the Advisor for a final review before going to the custodian.

Along with the paperwork is a “Limited Power of Attorney” which authorizes the Advisor to make mutual fund trades in the account.  Other than their quarterly management fees, the Advisor is not allowed to withdraw money from the account.  The client is always in control of the account, not the Advisor and not us.

How We Get Paid

By now you’re probably wondering how my company gets paid in this arrangement.  It’s very simple: the Advisor shares a portion of its management fee with us for introducing the account.  Active managers (like others) charge an annual fee, which is usually paid out on a quarterly basis.  The Advisor shares a portion of that management fee (typically one-third to one-half) with us for introducing the client.  We do not charge a fee on top of what the Advisor charges.

Some people think the Advisor will charge a smaller fee if they go direct, rather than through my company.  Not true – the annual fee is the same either way.  Most money managers rely on outside parties like my company to bring them new clients, and they are happy to share a portion of their fees.  To keep these relationships in place, they charge the same fee to all clients (fees can vary depending on account size).

So, there is no advantage in going directly to the Advisor after reading their names in this E-Letter and, in fact, there is a big disadvantage.  By being one of my clients, you will always know if ever we should withdraw our recommendation of any Advisor.  There have been a few occasions over the years when we withdrew our recommendation and advised clients to close their accounts.  You don’t want to rely on the Advisor to tell you when it’s time to move elsewhere because they won’t!

In addition, as one of my clients, you will always know when we find new Advisors as a result of our ongoing research and due diligence activities.  So you will not only know if we have withdrawn a recommendation, you will also know whenever we find additional Advisors we think you should consider.

We Eat Our Own Cooking

I have a rule that has served me well over the years.  I don’t ask you to invest with anyone unless I have my own money invested as well.  I have my own accounts with EVERY money manager we recommend.  I get the same performance results as our clients, and I pay the same management fees as our clients (even I don’t get a break in fees).

Actually, it is my own accounts that allow us to monitor the Advisors on a daily basis.  We look at every transaction, every trade and monitor all activity closely to see that the Advisors are continuing to follow their time-tested systems.  If we should see anything unusual, we contact the Advisor immediately.  Also, by watching what happens in my accounts each day, we also know what is happening in our clients’ accounts.


I continue to believe that most investors would achieve better performance results by using successful professional money managers to direct most of their stock and bond investments.  This is especially true in a more challenging market environment such as we have today.  Most investors are not prepared to deal with trading range markets.

On the other hand, the markets may surprise us once again this year, given that it’s an election year.  We could see the equity markets, for example, move out of the current trading ranges and into another strong upward trend.  Given this uncertainty, I believe your odds for success this year are much better with the professional Advisors we recommend as opposed to trying to discern these trends on your own.

Unfortunately, most professional money managers out there do not meet our rigorous standards, and we do not recommend them.  Only a small handful of the hundreds of professional Investment Advisors out there have passed our due diligence scrutiny and have been recommended to our clients.

As the title of this article suggests, we continually look far and wide (nationwide) to find the most successful Advisors.  Often these managers do not advertise or market themselves; instead they concentrate their efforts on investing; and as a result, they do not show up on most investors’ radar screens.  Unless you are willing (and able) to drill down deep in this industry, and spend the kind of time and money we do each year, you may never hear of the top performing money managers.

In the last year, I have written about three of the money managers we recommend in this E-Letter (two equity fund managers and one bond fund manager).  You can CLICK HERE to see their actual performance results, net of all fees and expenses.  There are other managers and specialty funds that we recommend as well.

If you find the current market environment frustrating, maybe you should check out the managers we recommend.  Call us at 800-348-3601.  We are always happy to visit with you and there is never any pressure to do anything.  I do, however, suggest that you get started sooner rather than later, since the current market environment may stay with us for a while.  And even if we do get some better than expected markets in this election year, our recommended Advisors should be on top of it, just as they were last year. As always, keep in mind that past performance is not necessarily indicative of future results.

Last but not least, if you know a good money manager we should check out, please let us know.  We are always looking for good Advisors.

Very best regards,

Gary D. Halbert



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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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