June 10, 2010, 11:16 p.m. EDT

Osterweis Shows How to 'Flex' Its Freedom

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By Sam Mamudi

Sometimes it pays to be in the right place at the right time, as the managers of Osterweis Fund /zigman2/quotes/205792452/realtime OSTFX -1.41% can attest.

As the stock market slid in late 2008 and investors watched losses pile up, Osterweis Fund (trading symbol: OSTFX) saw an increase in new money. The reason: While the fund invests primarily in stocks, it is a flexible fund whose managers are free to hold cash and even some short-term bonds if they think it is appropriate.

That is exactly what happened in the fourth quarter of 2008. As the market fell, Osterweis Fund's portfolio held 50% of its assets in cash and short-term bonds.

The fund lost 29% that year, nine percentage points better than Standard & Poor's 500-stock index, and management's only regret is that it wasn't quicker about leaving stocks.

"We sold our financial stocks in the first quarter of 2008, and sold our high-multiple stocks in the summer," said Matt Berler , portfolio manager at Osterweis Capital Management in San Francisco, and part of the team that runs the fund. "But we should have lowered [the rest of] our stock exposure sooner."

Osterweis falls into the stock-fund category, but its tactical approach to leaving stocks, if necessary, distinguishes the firm from many of its peers. It is a strategy that often preserves capital, and one that seems to be popular with investors still reeling from losses.

Osterweis saw $67 million of net inflows in the fourth quarter of 2008, and $399 million in 2009. The pace of flows has since slowed, but the $1 billion fund still saw $88 million in inflows in the first quarter this year. The fund is down 4.2% this year through Wednesday, according to investment researcher Morningstar. The S&P 500 is down 2.5% for the year.

From the start of the fourth quarter of 2008 to the end of this year's first quarter, all stock mutual funds saw net outflows of $93 billion, according to the Investment Company Institute, an industry trade group.

The idea of giving fund managers total freedom is catching on with investors. A small category known as global tactical-asset-allocation funds are popular, with the roughly $130 billion category seeing net inflows of $25.5 billion in the last four quarters, according to fund-research company Strategic Insight.

"Investors have been drawn to these funds in reaction to the financial crisis," said Loren Fox , senior research analyst at Strategic Insight. "Managing funds in an unconstrained or tactical manner can, theoretically, provide downside protection and some sort of absolute return during further episodes of extreme market volatility, goals [that] may appeal to more risk-averse investors.

"Some investors like the fact that these funds give their portfolio managers greater flexibility than funds designed to be plugged into style boxes; it can allow the managers to be more nimble," Mr. Fox said.

That flexibility often is absent in other mutual funds, in part because many managers run their funds for institutional clients, whether large investors or financial advisers. These clients typically allocate money to a manager based on a certain strategy—U.S. large-cap, for instance—and any reallocation is made by the client, not the manager.

But individual investors can suffer under this approach because they don't have such rigid allocations and rely on managers both for achieving gains and minimizing losses. As such, it is likely that flexible funds' popularity isn't going to wane soon. Mr. Fox said several funds of this type are being primed for launch.

The flexible approach also is popular for some managers, too, allowing them to pick and choose how they handle money.

Among funds with a go-anywhere, tactical approach, two of the largest are BlackRock Global Allocation Fund /zigman2/quotes/205546109/realtime MALOX -0.65% (MALOX), with $40 billion in assets, and the $20 billion Ivy Asset Strategy Fund /zigman2/quotes/203442261/realtime WASAX -0.58% (WASAX). Recent net inflows into these funds attest to the popularity of their approach.

Figures from Morningstar show that in the two years through April 30, Ivy Asset Strategy saw net inflows of $10.3 billion, second only to the $80 billion Vanguard Total Stock Market Index Fund /zigman2/quotes/202876707/realtime VTSMX -1.21% (VTSMX), which registered $20.5 billion in net inflows.

BlackRock Global Allocation saw net inflows of $3.6 billion in 2007, and finished 2008 and 2009 with net inflows of $7 billion and $6.3 billion, respectively. The fund saw more than $3 billion in net inflows in the first quarter.

Of course, the attraction of tactical funds over the past year or two has in large part been their performance.

The funds' ability to hold stocks, bonds, cash or even alternatives such as commodities or real estate meant many of them outperformed the market in 2008: Ivy Asset Strategy fell 26% and BlackRock Global Allocation lost 20% that year, according to Morningstar. Over five years, Ivy Asset Strategy has returned 11.4% on an annualized basis, while BlackRock Global Allocation is up 6.8%. The S&P 500 was down 0.5% during that period.

This year, Ivy Asset is down 8.2% and BlackRock Global is off 4.5% through Wednesday, according to Morningstar.

And as the Osterweis fund shows, even a tactical fund with a more-limited mandate can benefit when markets are bad.

"There are times when we, as managers, simply don't want to be fully invested," Osterweis's Mr. Berler said.

Write to Sam Mamudi at smamudi@marketwatch.com

/zigman2/quotes/205792452/realtime
US : U.S.: Nasdaq
$ 22.31
-0.32 -1.41%
Volume: 0.00
May 10, 2021
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/zigman2/quotes/205546109/realtime
US : U.S.: Nasdaq
$ 22.95
-0.15 -0.65%
Volume: 0.00
May 10, 2021
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/zigman2/quotes/203442261/realtime
US : U.S.: Nasdaq
$ 25.60
-0.15 -0.58%
Volume: 0.00
May 10, 2021
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/zigman2/quotes/202876707/realtime
US : U.S.: Nasdaq
$ 105.13
-1.29 -1.21%
Volume: 0.00
May 10, 2021
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