FundAlarm Annex - Fund Report

Fund name: Leuthold Asset Allocation (LAALX) (Update)

Objective: Leuthold Asset Allocation Fund seeks capital appreciation and income (or "total return") in amounts attainable by assuming only prudent investment risk over the long term.

Adviser: Leuthold Weeden Capital Management, a Minneapolis-based investment research firm founded in 1981 by Steve Leuthold. They began managing investments in 1987 and now have five mutual funds. All of the portfolios are team-managed; an investment strategy committee consisting of all firm portfolio managers and the senior analysts oversees all of the funds.

Manager: The fund is advised by a four-person team, led by the firm�s founder, Steven Leuthold. Three of the four managers here also manage Leuthold Core Investment Fund (LCORX).

Opening date: May 25, 2006.

Minimum investment: $10,000 for regular accounts, $1000 for IRAs.

Expense ratio: 2.05%. The 2.05% includes two atypical expenses. There�s a 12(b)1 fee of 0.25%, but folks who invest directly with the firm don�t have to pay that fee. The other are dividends on short positions. When a fund borrows stocks as a way to hold short positions, the fund is responsible for paying an amount equivalent to the borrowed stock�s dividends to the party from whom they borrowed it. That accounts for 0.55% of the fund�s total expenses, but that figure will vary a lot based on the size and composition of the short position.

Comments: Leuthold Asset Allocation is the successor to the successful, now-closed Leuthold Core Investment fund. Leuthold is distinguished for its rigorous, quantitative research which it incorporates into its portfolio designs. They track nearly 200 market data-points each week, and use that data to make both asset allocation and security selection decisions. The Core fund closed because its sector-based stock investment strategy had reached capacity; because their models might call for relatively large investments in relatively small sectors (Homeland Security stocks, or Industrial Gases � really), the firm wanted to limit the fund�s size with a tight close.

LAALX will mirror LCORX�s asset allocation. The difference will come in security selection. LAALX will be driven less by sector calls and more by individual security selection. Leuthold has been using this security selection model since 1997 and has been running it with "real money" since 2003. According to manager Matt Paschke, the security selection model yields nearly identical returns with the sector model but shows somewhat greater volatility. As a result, they�ve added a "value screen" to help keep LAALX�s risk profile comparable to LCORX�s.

The folks at Leuthold describe this as "a �flexible� fund, meaning that investments are allocated among equities, bonds, money market instruments and alternative investments." Typically they expect to hold between 30 and 70% in equities in and remainder in fixed income investments. In many ways, it�s the model for a hedge-fund like investment sold in the form of a mutual fund.

Exactly how "flexible" the fund is, is illustrated by its asset allocation as of June 1, 2006:

The argument for investing in Leuthold Asset Allocation is summed up in two words: Leuthold Core. Core offers access to an eclectic portfolio, some elements of which are rarely available to retail investors. It has, in the long term, produced outstanding results: about 12% per year since inception, which places it in the top few percent of its various peer groups. With the combination of broad asset diversification and the prospect for defensive positions, Core offers a unique and valuable resource. And Asset Allocation is the best way to mirror Core�s strengths.

Bottom line: For investors who don�t want to tie their fortunes purely to the movements of the stock market and who are not frightened by the prospect of noticeable short-term volatility, Asset Allocation offers a strong option.

Fund website: Leuthold Asset Allocation

Orignally posted: July 1, 2006

Update (posted July 1, 2010):

Assets: $1.3 billion Expenses: 1.34%

YTD return (through 6/17/10): (0.5%)

Our original thesis: "The argument for investing in Leuthold Asset Allocation is summed up in two words: Leuthold Core. . . [Core is closed and] Asset Allocation is the best way to mirror Core�s strengths.

Our revised thesis: LAALX is a pretty good way to access Leuthold�s go-anywhere, asset allocation expertise, which is what has made Leuthold Core (LCORX) remarkable over time. But, despite its higher expenses, Leuthold Global (GLBLX) might represent a stronger option.

As Leuthold Core approaches its 15^th anniversary (it launched in the fall of 1995), the fund has beaten every reasonable peer comparison. It�s placed in the top 2% of hybrid funds for the trailing five- and ten-year periods. A $10,000 investment at inception would have grown to over $36,000 here. The same investment in Vanguard�s very fine Balanced Index (VBINX), STAR (VGSTX) or Total Stock Market (VTSMX) funds would be worth between $7,000 and $11,000 less.

Leuthold Core remains closed to new investors, but Leuthold has rolled out two other asset allocation funds: LAALX and Global. LAALX has the same asset allocation as LCORX but selects its stocks different. LAALX focused on individual equities (the "select equities" approach) while LCORX focuses the most attractive sectors (the "select industries" approach). Leuthold has argued that the two strategies� returns over time will be comparable, though select equities might be more volatile.

Given Leuthold�s strengths, it makes more sense to trust them with the bigger picture "select industries" strategy than with the stock-by-stock "select equities" approach. Other investors � and possibly Leuthold itself � might agree, since they decided to merge their stand-alone Select Equities fund into Select Industries (LSLTX) fund at the start of 2010.

Leuthold Global uses the same asset allocation model and equity selection strategy as Leuthold Core. While Global is noticeably pricier than Asset Allocation (1.8% versus 1.3%), it likely has greater upside potential in the long-run. Leuthold now positions LAALX as "A flexible fund with a conservative, lower-risk approach . . . [whose] primary goal is to avoid undue risk while attempting to capture solid investment." Since its mid-2008 inception, Global has consistently outperformed Asset Allocation and Core. Any of the three funds will give you access to a remarkably diverse array of assets and strategies. LAALX�s May 2010 holdings are:

47% US stocks

19% emerging markets stocks

10% Short position on Treasuries

9% cash

7% Brazilian bonds

5% REITs

3% physical stocks of precious metals.

No other bonds. No developed market stocks. No stinkin� gold mining stocks; no, they�ve bought ingots. It�s a unique and, in the long term, uniquely successful strategy. Folks willing to sacrifice some gain in order to dodge some pain might find LAALX more comfortable than Global.

FundAlarm © 2006, 2010

Assets: $1.3 billion	Expenses: 1.34%
YTD return (through 6/17/10): (0.5%)
Our original thesis: "The argument for investing in Leuthold Asset Allocation is summed up in two words: Leuthold Core. . . [Core is closed and] Asset Allocation is the best way to mirror Core�s strengths. Our revised thesis: LAALX is a pretty good way to access Leuthold�s go-anywhere, asset allocation expertise, which is what has made Leuthold Core (LCORX) remarkable over time. But, despite its higher expenses, Leuthold Global (GLBLX) might represent a stronger option. As Leuthold Core approaches its 15^th anniversary (it launched in the fall of 1995), the fund has beaten every reasonable peer comparison. It�s placed in the top 2% of hybrid funds for the trailing five- and ten-year periods. A $10,000 investment at inception would have grown to over $36,000 here. The same investment in Vanguard�s very fine Balanced Index (VBINX), STAR (VGSTX) or Total Stock Market (VTSMX) funds would be worth between $7,000 and $11,000 less. Leuthold Core remains closed to new investors, but Leuthold has rolled out two other asset allocation funds: LAALX and Global. LAALX has the same asset allocation as LCORX but selects its stocks different. LAALX focused on individual equities (the "select equities" approach) while LCORX focuses the most attractive sectors (the "select industries" approach). Leuthold has argued that the two strategies� returns over time will be comparable, though select equities might be more volatile. Given Leuthold�s strengths, it makes more sense to trust them with the bigger picture "select industries" strategy than with the stock-by-stock "select equities" approach. Other investors � and possibly Leuthold itself � might agree, since they decided to merge their stand-alone Select Equities fund into Select Industries (LSLTX) fund at the start of 2010. Leuthold Global uses the same asset allocation model and equity selection strategy as Leuthold Core. While Global is noticeably pricier than Asset Allocation (1.8% versus 1.3%), it likely has greater upside potential in the long-run. Leuthold now positions LAALX as "A flexible fund with a conservative, lower-risk approach . . . [whose] primary goal is to avoid undue risk while attempting to capture solid investment." Since its mid-2008 inception, Global has consistently outperformed Asset Allocation and Core. Any of the three funds will give you access to a remarkably diverse array of assets and strategies. LAALX�s May 2010 holdings are: 47% US stocks 19% emerging markets stocks 10% Short position on Treasuries 9% cash 7% Brazilian bonds 5% REITs 3% physical stocks of precious metals. No other bonds. No developed market stocks. No stinkin� gold mining stocks; no, they�ve bought ingots. It�s a unique and, in the long term, uniquely successful strategy. Folks willing to sacrifice some gain in order to dodge some pain might find LAALX more comfortable than Global.