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Fund Times: Muhlenkamp Assesses Chance of a 'Soft Landing'

Plus, news on Powershares, RiverSource, American Century, and more.

Morningstar Analysts, 10/23/2006

It's a rare case when a prominent manager acknowledges that part of his investment strategy is based on current macroeconomic thinking, not solely on fundamental research or a company's growth potential. But investor Ron Muhlenkamp has long done just that, and as his recent third-quarter update to shareholders of Muhlenkamp Fund MUHLX shows, he'll speak frankly with investors about his view on the state of the economy, the stock market, and today's headline-grabbing issues.

Muhlenkamp begins his recent quarterly update with a look back at the past few years in the market. Citing a strong economic recovery from 2002 to 2005 coupled with a rise in short-term rates, he notes that inflationary fears slowly crept into the market. Rising commodity prices did nothing but stoke those concerns, yet Muhlenkamp says that one of the true causes of inflation--the federal government printing money faster than the economy grows--remained well under wraps. In short, he didn't fear inflation as much as the market did.

Market fears change quickly, though, and Muhlenkamp believes the market now reflects a different scenario: a possible recession. Factors such as the recent pause by the Fed on short-term rates and declining commodity prices caused utilities, consumer-staples, and health-care companies to assume market leadership this summer--all of which Muhlenkamp says would make sense in the face of a possible recession.

Muhlenkamp stops short of agreeing that now is a good time to load up on defensive stocks. Though he acknowledges that Fed rate-tightening could cause a recession--most attempts by the Fed to engineer a 'soft-landing' over the past 50 years have failed--he believes it could be different this time as the latest data show recession drivers dissipating. This thinking drives his thesis that 'it's a good time to be investing in the companies we own.' Indeed, he's keeping one of his most economically sensitive stocks, home lender Countrywide Financial CFC, as a top-10 position in the portfolio.

Powershares to Sponsor Cubes
On Friday, the Nasdaq Stock Market NDAQ announced that it will transfer sponsorship rights of its six popular ETFs to PowerShares, a unit of Amvescap PLC AVZ. Though the deal must obtain regulatory approvals before it clears, Nasdaq expects it to close by June. Notably, the deal includes the market's most popular ETF, Nasdaq-100 Index Tracking Stock QQQQ, which has $17.4 billion in assets and whose shares are commonly called Cubes.

In a press release, Nasdaq Global Funds CEO John Jacobs said that the deal will be helpful in "providing compelling portfolios and investment tools for advisers and investors." In other words, advisors who sell PowerShares ETFs now have more options for investors.

RiverSource Tries to Improve Struggling Fund
Minneapolis-based RiverSource Investments announced last week a management change at its Mid Cap Growth Fund INVPX. Duncan Evered, who led this offering since February 2000, is being replaced by John Schonberg, a senior equity leader who will run the fund on an interim basis. Schonberg will work with RiverSource's CIO to find a permanent manager for the fund.

We liked Evered's strategy. He preferred firms whose growth was more stable year over year, a strategy that steered the fund to very respectable returns in both 2001 and 2002. But performance since then has been a tough pill for shareholders to swallow, as more speculative fare ruled the roost starting in 2003. That shift caused returns to drop into the mid-growth category's bottom quintile in 2003 and 2004.PAGEBREAK

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