Q: What's your opinion of my shares of Merrill Lynch & Co.? The company seems to be doing really well. --K.T., via the Internet
A: To quote a market adage: Trees don't grow to the sky.
Despite recent dramatic success, it seems inevitable that the largest U.S. brokerage firm, with offices in 36 countries, will encounter some fits and starts because that's simply the way that the financial markets operate.
Shares of Merrill Lynch (MER) are up 10 percent this year following last year's 13 percent gain, a 2 percent gain in 2004 and a 54 percent jump in 2003. Earnings in its most recent quarter rose 44percent, boosted by strong results in its investment banking and brokerage businesses.
Stanley O'Neal, chief executive since December 2002, has partnered with MBNA to issue credit cards. He has expanded mortgage and middle-market lending and invested heavily in improving technology capabilities. A true believer, O'Neal personally owns a million Merrill Lynch shares. His total stake is 3 million shares when options are included.
The firm is expanding globally by partnering with local firms in other countries and recently gained approval to trade Vietnamese shares as a foreign investor. Operating margins continue to widen thanks to cost controls.
Despite all this activity, Merrill Lynch stock slipped after its earnings news because management also raised concerns about a downturn in the markets.
Based on Merrill Lynch's size and efficiency, its consensus rating from the Wall Street analysts who track its stock is a "buy," according to Thomson Financial. That consists of eight "strong buys," seven "buys" and three "holds."
Merrill Lynch is part of the private equity consortium involved in the $33 billion buyout of HCA Inc., the No. 1 U.S. hospital chain. It is also swapping its investment management business for almost half of money-management firm BlackRock Inc. to remove the conflict of having its brokers sell its in-house funds.
Though Merrill Lynch is a dominant financial force, over the years the company has had to hire and fire significant numbers of employees to stay in step with market trends.
Earnings are expected to be flat this year, while the growth rate predicted for the national investment brokerage industry is 15 percent. Next year's projected 31 percent increase compares with 12 percent forecast for its peers. The expected five-year annualized growth rate of 12 percent is in line with the industry.
Enron Corp. has figured into several recent proceedings involving Merrill Lynch.
Merrill Lynch agreed to pay Enron $29.5 million to settle its portion of a lawsuit filed against 10 banks accused of failing to prevent the energy firm's demise. In addition, a U.S. Appeals Court in New Orleans overturned some convictions of several former Merrill Lynch executives involving a business deal the Justice Department contended illegally increased Enron's reported earnings.
Q: Could I have your opinion of AIM Capital Development Fund? It has been recommended. --R.L., via the Internet
A: It's a "steady as we go" fund unlikely to upset your stomach.
Since 1998, Paul Rasplicka has run it successfully by avoiding big bets and spreading his portfolio over a wide variety of stock groups and names. His desire to be safe rather than sorry has paid off well for investors sharing that philosophy.
The $1.4 billion AIM Capital Development Fund (ACDAX) is up 9 percent over the past 12 months and has a three-year annualized return of 15 percent. Both results rank in the top one-fifth of mid-cap growth funds.
"I like this fund because its manager has done a good job over the years in different market environments and also has a lot of experience," said Karen Dolan, analyst with Morningstar Inc. in Chicago. "I see this fund as a supporting player in an individual's portfolio and a good complement to a large-cap core holding."
Rasplicka limits the portfolio to around 100 stocks. Seeking earnings momentum and growth, he is willing to consider both beaten-down and much-respected names. Though he has kept volatility to a minimum, the fund has lagged the pack in speculative growth rallies. Rasplicka also runs AIM Dynamics Fund (IDYAX).
About 64 percent of AIM Capital Development's portfolio is in mid-cap stocks, while large stocks represent 26 percent and small-caps 10 percent. Among the fund's largest concentrations, health care represents 18 percent of assets, while technology hardware, energy and business services each represent about 12 percent.
Top stock holdings were recently Alliance Data Systems, Precision Castparts, CB Richard Ellis Group, Qwest Communications International, AmeriCredit, Charles Schwab, Wesco International, CH Robinson Worldwide, Corrections Corporation of America and Amdocs.
This 5.5 percent "load" (sales charge) fund requires a $1,000 minimum initial investment and has an annual expense ratio of 1.36 percent.
Q: I assume the "buy low, sell high" rule applies to mutual funds as well as stocks. So how do I do that when rebalancing my portfolio? --J.H., Hickory Hills, Ill.
A First, take a look at the recent performance of various types of funds.
For example, funds investing in small-cap stocks have done much better than funds investing in large-cap stocks for the past seven years. If you had equally divided your portfolio among large-, mid- and small-cap stocks seven years ago, by now your portfolio would be heavily weighted toward small-caps.
"Rebalancing would mean selling some of your small-cap fund holdings and reinvesting the proceeds in your large-cap funds, which is something I'm recommending," said Mark Salzinger, editor of The No-Load Fund Investor (noloadfundinvestor.com) in Brentwood, Tenn. "By trimming back your winners and adding to your losers, you're essentially doing the same thing as selling high and buying low."
Rebalance only if your allocation is at least five to 10 percentage points off from what you want it to be, Salzinger recommends. Look at your asset allocation once a month, or at least once a quarter, to see how it shapes up. But don't rebalance too often, because you might end up paying a hefty chunk in taxes, he said.
Andrew Leckey is a Tribune Media Services columnist. E-mail him at email@example.com.Copyright © 2015, CT Now