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Federated fund avoids risky markets, cuts U.S. holdings

By Chris Graja
Bloomberg News

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Steven Lehman is avoiding the U.S. stock market in his $1.7 billion Federated Market Opportunity Fund because he says equity prices may go lower and stay there.

"I would view any rally before the end of the year as a selling opportunity," said Lehman, 47. "It isn't a new bull market."

Lehman had 55 percent of his mutual fund's assets in cash at the end of July, the highest since Federated opened the fund in December 2000, and just 4 percent in U.S. stocks, down from more than 50 percent in 2001.

He said he's bearish because stocks are expensive and the economy is overburdened with debt.

Reducing his U.S. stock holdings helped shield investors from stagnant markets.

The Federated fund rose at an average annual rate of 8.2 percent during the past three years, ranking fourth of 41 funds that have the flexibility to invest in a variety of assets such as stocks, bonds, real estate and cash. The Standard & Poor's 500 Index gained an average 0.8 percent a year in the same period.

Lehman is concerned that tax cuts championed by President Bush and the Federal Reserve's policy of keeping borrowing rates near the lowest levels in almost 50 years have led to a surge in debt without a corresponding rise in economic growth.

The economy expanded at an annual rate of 2.8 percent during the second quarter, and the Congressional Budget Office projects the U.S. budget deficit will reach a record $420 billion in this fiscal year.

The Federated fund is managed to avoid what Lehman perceives as major risks. In addition to 55 percent in cash and 4 percent in U.S. stocks, the fund has 9 percent of its assets in U.S. and non-U.S. bonds that mature in less than three years; 26 percent in non-U.S. stocks; 4 percent in U.S. high-yield bonds; and 2 percent in contracts that gain value when stock prices fall.

Investments in real-estate-investment trusts boosted the fund's returns during the past three years. Lehman cut his holdings in REITs during the second half of last year and then repurchased some shares in April after they plunged amid concern that prices would be hurt by rising interest rates.
 
One of his purchases was 753,000 shares of Health Care Property Investors, an investor in more than 500 health-care facilities, including 30 hospitals. He also bought shares of Regency Centers, a U.S. owner and developer of shopping centers anchored by grocery stores.

Lehman said his biggest blunder this year was holding onto shares of gold producers such as Harmony Gold Mining, the biggest miner of South African gold. The mistake was retaining the stocks after gold prices peaked at about $430 an ounce in April, he said. Shares of Harmony Gold are down about 19 percent since then.

The Federated fund has profited from the increase in stocks such as OMV AG, Austria's biggest oil company, and Husky Energy, a Canadian oil and natural-gas producer. He reduced his positions in the two stocks after they more than doubled in the past two years.

Top holdings at the end of July included New Zealand Government bonds maturing in 2005, Swedish Treasury bills maturing next March and an option contract on the S&P 500 whose value at expiration depends on the benchmark's value being below 1,250.

Lehman's fund charges lower fees than similarly managed funds. Its expense ratio is $1.30 per $1,000 invested. Since the fund is marketed through financial advisers and brokers, it also has an upfront sales commission of $5.50 for each $1,000 invested.