Markets: News  

In market's lull, managers avoid big gambles

SAN FRANCISCO (MarketWatch) -- As stock markets hit a lull amid tepid summer trading volume and slumbering volatility, portfolio managers say they're searching for something of a middle ground.

Instead of making major gambles, many advisers are trying to make more refined bets against a backdrop of ongoing market uncertainty.

"The market seems to be at an inflection point--it could move either way depending on events in Europe, China and the U.S.," says Sameer Samana, an international equities strategist with the Wells Fargo Advisors team that handles exchange-traded fund portfolios.

Cloudy macroeconomic conditions are making any major asset allocation changes difficult, says Christian Wagner, chief investment officer at Longview Capital Management.

At the same time, he's finding current conditions "an ideal environment for rebalancing around the edges of a portfolio."

Mr. Samana agrees. "We're using the stock market's recent bounce to rebalance between our satellite positions," he says. "At the same time, we're keeping our core holdings steady to maintain long-term allocations for the portfolio as a whole."

Wells Fargo Advisors, which runs some $7 billion in assets through ETF-managed portfolios, is tactically leaning to a more defensive posture.

While stocks appear to have hit a near-term bottom in June, Mr. Samana believes that global markets still appear "quite vulnerable" over the next several months.

As a result, Wells Fargo's ETF managers are taking chips off the table in the broad PowerShares DB Commodity Index Tracking Fund (DBC) . The firm's ETF-managed portfolios have been overweighting positions in gold and energy funds, however, Mr. Samana notes.

"While we see more upside in those areas, we're avoiding agriculture. It looks late in the game to be adding to those funds," he says.

For the time being, any jump in European stocks or U.S. financials should be viewed as an opportunity to take profits, Mr. Samana suggests. Wells Fargo is rotating back into "more steady Eddie" domestic-sector ETFs such as the Vanguard Telecom Services (VOX) , he adds.

At Longview Capital, Mr. Wagner says his managers have been taking profits in health-care and consumer-staples sector ETFs, while putting proceeds into funds focused on energy and technology stocks. The advisory firm in Wilmington, Del., runs $200 million in assets and largely uses ETFs in separate accounts.

In a more global view, Mr. Wagner says he has also been shifting into ETFs focused on economies his team believes feature strong balance sheets and relatively low debt levels. Those include Canada, Mexico, Singapore, South Korea and Thailand.

"This has been a very, very slow summer in terms of trading volume," Mr. Wagner says. "But we've been seeing indications in the last two weeks of more institutional participation, something we believe could be a very positive development for stocks."

Portfolio managers at Evensky & Katz Wealth Management in Coral Gables, Fla., are also rebalancing, although for different reasons. Advisers at the firm, which oversee $750 million in assets, say they stick to a "quantitative" type of process that centers around pre-determined "bands" for different types of funds.

Most fall in the 10%-20% range, relative to individual risk levels. For example, a portfolio with 35% of assets going to small-cap U.S. stocks would be rebalanced if those funds shifted by 3.5% or more at the lower end of such allocation bands, says Matt McGrath, an Evensky & Katz managing partner.

The firm is generally trimming positions in funds with higher risk profiles, he adds. Those include the DFA U.S. Small Cap Value ((DFSVX) ) and the DFA International Core Equity (DFIEX) .

"There's a lot of uncertainty in markets right now," Mr. McGrath says. "By setting strict rebalancing bands, we're trying to take the emotions out of the equation and let markets make the final determinations."