BOSTON -- Harvey Hirschhorn, manager of the $225 million Stein Roe Balanced Fund, is moving money out of U.S. stock markets. He thinks they're a bad bet right now.
Daniel Rie, director of Colonial Management Associates Inc.'s $3 billion equities investment group, isn't a big fan of bonds. He thinks corporate earnings will continue to improve.
"The stock market's outlook is strong as far as I'm concerned," Rie said.
Hirschhorn and Rie are the yin and yang of leading mutual fund managers who are as confounded as the rest of the global investing community by the direction of the markets, interest rates and the mind of Federal Reserve Chairman Alan Greenspan.
"We have less than 40 percent of the overall portfolio in U.S. stocks," Hirschhorn said. "Typically, we're closer to 50 percent." Hirschhorn is concerned about the outlook for U.S. stocks because Treasury bond yields keep going higher. The yield of the benchmark 30-year bond is at the 7.1 percent level, up from a two-year low of 5.95 percent on Dec. 29.
"With yields above 7 percent, the bond market is a less risky TTC place to invest than the stock market," Hirschhorn said.
U.S. stocks have lost value since early February, as measured by the Standard & Poor's 500 Index, when the 30-year bond yield rose above 6 percent, Hirschhorn said. The S&P; 500 is down about 0.4 percent since Feb. 9.
When bond yields rise, investors tend to buy more fixed-income securities, attracted by the steady return they offer relative to stocks.
Colonial Management's Rie isn't quite as sanguine about bonds.
"Analysts' earnings estimates keep going higher, and as long as this trend is in place, stocks will also move higher," Rie said.
The equities funds he helps oversee are recording average gains of 7.59 percent this year through Aug. 29, Lipper Analytical Services Inc. reported. That compares with a 6.73 percent gain for the S&P; 500 in the same period.
Hirschhorn's bearish stand on equities isn't hurting the returns of his Balanced fund. The Stein Roe fund ranks No. 29 of 188 "flexible portfolio" funds tracked this year by Lipper Analytical Services Inc. It's up almost 7.9 percent on a total-return basis.
The Stein Roe Balanced Fund is investing in mostly long-term Treasuries and highly rated corporate bonds, Hirschhorn said.
"We think you'll be able to make the most money in coming years by taking the least amount of risks," he said.
On both sides of the fence, risk-avoidance has become the name of the game. Choosing a navigator, however, is the trick. The real answer for any bewildered investor is to look for accomplished and adroit fund managers of whatever investing philosophy.
Christopher Ely, a fund manager at Loomis, Sayles & Co., agreed with Hirschhorn's outlook that stocks won't go much higher with bond yields as high as they are. "It's hard to make a case for an improving stock market with long-term bond yields above 7 percent," he said.
Kevin Baker, manager of the $300 million John Hancock Special Opportunities Fund, agrees with Rie's view that U.S. stocks will appreciate as long as corporate earnings growth stays strong. If earnings worsen and bond yields rise further, the stock market will be in trouble, he said.
"If there's a persistent rise in rates, it will pose problems for the equities market," Baker said. "I don't have a crystal ball, but over a protracted period, higher rates mean lower stock prices."
The Fed's policy-making committee is scheduled to meet Sept. 24.
"We're getting to a critical point," said Anthony Gray, who oversees about $1.5 billion in fund assets for SunTrust Bank Inc. in Orlando, Florida. "The stock market is higher than it should be, and if rates go higher, the market's in trouble."
Pub Date: 9/08/96