A Fund That Divides to Conquer

The MainStay Balanced Fund splits its portfolio into 60% stocks and 40% bonds -- an approach that returned 23% in 2003

Striking a balance in volatile financial markets is never easy, but Joan Sebella, co-manager of the MainStay Balanced Fund (MBACX ), makes it look effortless. Her fund, formerly known as the Eclipse Balanced Fund, combines mid-cap value stocks with short- and intermediate-term bonds. It's A-rated by BusinessWeek for delivering excellent returns while keeping risk at a minimum. Its five-year annualized return is 7.9%, vs. a 3.2% gain for its typical peer during the period (for complete results of more than 5,000 funds, see BW Online's Interactive Mutual Fund Scoreboard.) BusinessWeek Reporter Kate Hazelwood recently caught up with Sebella in a telephone interview. Edited excerpts of their conversation follow:

Q: Why did the name of the fund change on Jan. 1? Are other changes ahead?


On a corporate level they were changing names, and since there would no longer be the Eclipse name in the marketplace, we made the change too. We have the same manager -- I've managed the fund since its inception -- it's the same fund. And, of course, there's no change in our track record. The fund has added a load, and it will now be available through financial advisers.

Q: As a quantitatively focused fund, how much flexibility do you really have?


We're quant totally, but we're asking the same questions an analyst would ask of management. It's just that being a quantitative fund allows us to look at a lot of companies at the same time -- by visiting the data and not the companies. We run our models weekly, and every week we look to see if there are new purchases [we should make], reasons to trim, reasons to sell.

Q: How actively do you manage your risk?


We're active managers, not passive. That helps risk. We have diversification of stocks and industries. No more than 25% of the equities are in one industry at the same time. It's the same thing on the bond side.

We use some good risk indicators, too -- no more than 3% in any one bond, and that's on the heavy side when it happens. I don't believe we have even one bond that's at 3% right now, but it could happen. And, of course, the 1.2% equity position is a maximum, but we're not going to go to it on some thinly traded stock. And on our bond portfolio, we ladder it so we have some money coming off each year.

Q: How consistent are you in your holdings percentages, especially when you have an overperformer?


We are 60% mid-cap value stocks and 40% short- to intermediate-investment-grade bonds. We stick to it all the time. We're not making a bet that maybe equities will do better and that we should go 70%/30% for [a certain period] of time. If there's large market appreciation in our holdings and equities rise above that 60%, we'll trim positions to get back to that 60%/40% mix.

No stock in the portfolio enters at larger than 1.2%. And again, it's a way of controlling risk. Other positions might be smaller depending on volume, but no one is larger than 1.2%. If a stock appreciates and we have a target position, we'll let that run a bit, but we will take out some of our profits. In terms of how far we will let it run up from there, it's a case-by-case basis. You will never see a stock that is positioned at 2%. Not even if it's highly liquid, not even if it's highly ranked.

Q: How did you perform in 2003?


The return on the fund for 2003 was 23.94%. As far as specific stocks, I can just tell you some industries that did well. Of course, banks and health-care equipment and services [performed]. We don't stay away from any specific industry. Because we're bottoms up and not sector pros, our performance in a particular sector isn't a result of making a bet on that sector.

It may turn out that a specific industry isn't in our holdings at a specific time -- but that's just a matter of the quant model telling us what the fundamentals look like. So we're not trying to bench the benchmark, it's just how it turns out.

Edited by Beth Belton

Before it's here, it's on the Bloomberg Terminal.