A Fund That Does Whatever Works

The Leuthold Core Fund has a focus that's hard to pin down -- with returns that are hard to match

By James A. Anderson

You can't say the Leuthold Core Fund (LCORX ) is set in its ways. Over the past year, it has taken both short and long positions on stocks. It has carried a cash position equaling almost 50% of its assets. And it took a stab at junk bonds.

Think that's a lot of gyrations? Two years ago, co-managers Steve Leuthold and Jim Floyd, who call the shots from the fund's headquarters in Minneapolis, steered the fund into biotech stocks. Back in 1998, when Asia's economies were reeling, the two took a position in mutual funds that invested in the region.


  But while Leuthold Core may go through more makeovers than Glamour magazine could cook up in a year, its track record looks consistent, nonetheless. Over the three-year period ended Dec. 31, 2000, the fund had averaged an annual total return of 14.5%, compared to 12.3% for the S&P 500. Last year, Leuthold Core's maneuvers generated an impressive 22.7% for investors while the benchmark slid almost 9%. And even during the market's recent meltdown, the fund has managed to tread water with a -1.7% total return year-to-date through Mar. 21, compared to a -14.8% for the S&P 500.

Its willingness to switch gears makes Leuthold Core hard to classify. It's not really a stock fund because it bets on bonds. It's not a growth fund, nor a value offering. Morningstar lumps Leuthold Core in its hybrid category, a grouping reserved for balanced funds or portfolios that mix stocks with bonds.

Co-manager Floyd agrees with that assessment. "We take something of a balanced-fund approach if only because we're employing tactical asset allocation by adding to classes we feel will outperform and trimming down those that are likely to lag the market," he says. That doesn't mean Leuthold Core is a good substitute for a balanced fund. "Management can buy anything and everything from stocks to other mutual funds and invest all over the spectrum from emerging markets to quality bonds to value stocks," says Morningstar analyst Catherine Hickey. "It's not your typical balanced fund and might not be for every investor, because you never know what you're going to get."


  That said, Hickey believes that the fund has some very positive attributes. Its yield -- 4.2% by Morningstar's last count -- is considerably higher than the 2.9% that hybrid funds as a whole average. And despite a jaw-dropping 159% turnover of the fund's portfolio compared to 97% for the average hybrid fund, Hickey points out that the fund has managed to keep risk to a minimum and has even found a way to lessen the potential tax bite created by trading in and out of positions. In fact, Hickey says, the fund's tax-adjusted returns rank in the top 10 positions of its Morningstar category.

Co-manager Floyd and his partner Leuthold take any number of liberties based on how they've gauged the markets. "We're likely to mix small-caps with large issues," says Floyd. "And if we feel it's right, we'll go either with undervalued stocks in out-of-favor businesses or tech plays, depending on circumstances."

This past year was no exception. At one point in 2000, Leuthold Core correctly predicted a downturn in equities. At the end of the second quarter, it trimmed its stake in the stock market to just 26% of its assets. Management used just over half of that position -- 14% of assets -- to short the market, betting that stocks would sink. It chose to retreat from bonds as well, lowering its fixed-income stake to 26% at the same time.


  One sector management seized upon was education. "Last year, we felt education was a great theme, and e-learning companies looked like a great play," Floyd recalls. A favorite was Corinthian Colleges (COCO ), a Santa Ana (Calif.) outfit that runs 52 technical- and adult-degree colleges around the nation. Last summer, the fund started buying the company's stock, paying an average price of $12 a share. Corinthian closed at $37.38 on Mar. 21, a 211% increase.

Another education pick was Career Education (CECO ), a company based outside of Chicago that also offers post-secondary degree programs at 17 schools around the country. Leuthold began buying the stock in March, 2000, at an average price of $19.50. Career Education closed Mar. 21 at $46.13 for a 136.5% gain.

The fund saw another equally compelling bargain in junk bonds at the end of 2000. Bond investors were bracing for a slowdown, and many expected credit problems to cause a hefty rise in defaults. "We looked out and saw fat coupons of 13%-plus," recounts Floyd. "At that point, we simply had to take as much emotion out of our investment decision and run some comparisons." The Leuthold fund took a stake by investing in high-yield-bond funds. The move paid off. Leuthold's junk-bond fund portfolio -- now 7% of assets -- has produced a total return of 5.6% year-to-date.


  One bet that didn't pan out in 2000 was in information-technology-consulting stocks. Floyd reveals that the fund originally took a small bite of the sector with stocks like Cambridge Technology Partners (CATP ), Safeguard Scientifics (SFE ), and MasTec (MTZ ). "Our thinking was that the stock market would link those companies to consulting and advising firms. What we found out, however, was that investors tied them to the Internet," says Floyd. The result: As the group continued dropping, the fund mulled over its investment and closed out at a loss of about 23%.

In the current market, Leuthold Core has put on its value-investing colors. "With the economy in a recession, we've been putting money in small-cap value shares which we feel have a good chance to continue to outperform the market," says Floyd, adding that the fund's management has actually concocted a screen to dig up just those types of shares. He says he has been looking for companies that have carried an average price-to-earnings multiple of 12 or less over the past five years, a price-to-book of 1.5 or lower, and dividend yield of at least 3%. His search requires that a company carry a long-term debt load that's under 50% of capital and a stock price that's no more than 10 times cash flow compared to the 15 the S&P 500 is averaging.

Focusing on companies that meet six of those seven criteria whittles a market of 9,500 stocks down to 75, says Floyd. The list that remains is filled with utilities, REITs, "tire and auto companies, and other ugly stuff," he points out.


  Still, Floyd thinks two sectors that crop up in the screen -- insurance and oil and gas exploration -- are already starting to show signs of renewed life. The money manager feels that MetLife, an insurer whose stock has been battered this year with a -20.9% performance, should start to see things turn around. He believes that MET could work its way to $40 a share before it's fully valued by the market. MetLife closed Mar. 21 at $27.68 a share. Floyd also thinks that another neglected insurance stock, American General, down 10% year-to-date after closing at $36.45 on Mar. 21, has the wherewithal to make it to $90 a share in the next 12 months.

Floyd's screen has also unearthed energy stocks, now 7% of the fund's assets. One name management likes is driller Nobel Affiliates (NBL ) a stock that closed at $44.96 on Mar. 21 and is currently off 2.2% for the year. With oil and gas prices high and possibly rising more, Noble could be on the move to as high as $60 a share in the next year, says the fund manager.

One thing is for certain, if you're looking for active mutual-fund management, the Leuthold Core fund is certain to please. And judging by its results and the mire the equity market seems stuck in, that might not be such a bad thing.

Anderson teaches journalism at the City University of New York. Follow his twice-monthly Mutual Fund Maven column, only on BW Online

Edited by Patricia O'Connell

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