If ever there were a time to flex those stock-picking muscles, this is it.
Increased volatility and uncertainty is creating pandemonium on Wall Street, leading some traders and money managers to load up on cash or trade more frequently.
"We're finding a little bit here and there, but right now it's a hunting expedition," said Stephen Lieber, lead portfolio manager of the Alpine Dynamic Innovators Fund.
Since mid-January, the stock market has taken on characteristics reminiscent of the early 1970s, said Mr. Lieber, chief investment officer of Alpine Woods Capital Investors LLC in Purchase, N.Y.
So far, the down-market cycle, which began to take shape last summer, appears to have carried into 2008. Year-to-date through last Wednesday, the Standard & Poor's 500 stock index had fallen 6.9%.
The Dow Jones Industrial Average, meanwhile, had shed 5.4%, and the Nasdaq Composite Index had dropped 10.5%.
CASH IS KING
For professional stock pickers, today's market conditions seem to defy logic.
"There are a lot of people like myself who are just sitting in money market funds right now," said Will Hepburn, vice president of the National Association of Active Investment Managers, a Littleton, Colo.-based trade group comprising advisers who prefer trading to long-term buy-and-hold strategies.
The average allocation to equities among the NAAIM advisers had dropped to 15.5% as of Feb. 13, from 30% a week earlier and 83% on Jan. 2.
"That tells you our members are pretty much out of the market," said Mr. Hepburn, who is also president of Hepburn Capital Management LLC of Prescott, Ariz.
Of the $20 million Mr. Hepburn has under management, about $13 million is parked in cash or hedged in some way against long-market exposure.
Even money managers who don't think of themselves as market timers are finding comfort on the sidelines.
"We're seeing relentless liquidations and faith is being challenged," said Mr. Lieber, who has allocated almost half of the $68 million Alpine Dynamic Innovators Fund's assets to cash.
"It's a tough time in terms of dealing with the volatility and all the other things beyond our control," said B. Anthony Weber, who manages the $55 million Aston/Veredus Select Growth Fund for Veredus Asset Management LLC in Louis-ville, Ky.
"It reminds me of 1990 and 1998 when we saw [stock-price] spreads blowing up based on immense fear," he added. "It's all part of the market trying to find a bottom, but meanwhile we still have to focus on finding good companies."
A study released last week by Merrill Lynch & Co. Inc. of New York showed that 41% of 190 money managers worldwide were overweighted in cash. Indeed, the study, which was conducted about two weeks ago, found that the managers had more money in cash than they have had since right after the September 2001 terrorist attacks.
Average cash levels climbed to 4.7% in February, up from 3.9% in January, according to the report.
For investors, this could mean uninspiring returns for their mutual funds in the short term. But it could help prevent the kinds of double-digit losses that many funds posted at the beginning of the decade.
Part of what is making the job of stock picking so difficult is the market's tendency to overreact, said Mr. Weber.
Two weeks ago, for example, when San Jose, Calif.-based Cisco Systems Inc. reported earning 38 cents per share during the fourth quarter of 2007, the stock's trading volume almost doubled its historical average over the next two weeks. Meanwhile, the stock's price was temporarily driven down 11%.
INVESTORS ARE JITTERY
Since Cisco's earnings were exactly what analysts' estimates had called for, Mr. Weber attributed the market's reaction to the company's generic statements regarding the state of the economy.
"There's no question the market is trigger-happy," he said. "It's 'shoot first and ask questions later.'"
At least partially offsetting the general aversion to risk, some money managers have adopted a contrarian view by trying to take advantage of the negative sentiment.
"It's like taking a 10-year-old to the Dollar Store with a gift certificate; the only challenge is making sure you buy good stuff," said Paul Sutherland, president of FIM Group, a Traverse City, Mich.-based mutual fund shop with $700 million under management.
"I call it wealth transfer, because this is when wealth gets transferred to smart people," he added.
Despite the contrarian view, Mr. Sutherland said the fund company's average cash weighting is at 11%.
Recognizing the existence of a
bear market hasn't stalled the enthusiasm of Sam Jones, president of All Season Financial Advisors Inc. in Denver.
The firm manages $115 million in client assets.
"I'm quite a bit more optimistic than those who say we're in the nastiest nastiness of the nasties," he said. "I see a tremendous amount of opportunity, and I am seeing evidence that we're approaching a meaningful low."
That opinion is not shared by Iain Clark, who oversees global stock picking for the $3.6 billion Henderson International Opportunities Fund.
"We've seen some stock prices come down a very long way," said Mr. Henderson, who is based in the London headquarters of Henderson Investment Management Ltd.
"It is going to be pretty difficult to predict what the markets will do over the next three or four months," he added. "We're fairly confident it will be volatile, so our strategy has been to focus on a limited number of stocks."
The international fund has an 8% cash weighting, which compares to an historical average of less than 3% cash.
Safety has become the immediate objective for veteran adviser Bert Whitehead, president of Cambridge Connection Inc. in Franklin, Mich.
"We're using laddered Treasuries as a foundation because when it comes to bonds, safety trumps yield," he said.
Jeff Benjamin can be reached at [email protected].
