i'm remaining so bearish folks. just to say i've got good...

i'm remaining so bearish folks. just to say i've got good company.

bloomberg.

Federated Investors' Lehman Prepares Fund for Stock-Market Rout

By Sree Vidya Bhaktavatsalam

Sept. 14 (Bloomberg) -- Steven Lehman, whose $3 billion Federated Market Opportunity Fund has beaten more than 90 percent of its peers during the past five years, is more bearish than any time since stock markets peaked in 2000.

The 49-year-old manager more than doubled the fund's cash holdings in the past year to 36 percent and put 34.5 percent in bonds. He has another 5 percent in options that rise in value when equity prices fall. Lehman has just 12 percent of the Federated fund's assets in stocks, the least since the fund opened six years ago. The rest is in preferred shares and convertible bonds.

``I've positioned the portfolio for what I think will be a very difficult bottom here in the U.S. market and I'm waiting,'' Lehman said in an interview from his office in Pittsburgh. Falling home prices and weaker consumer spending will slow economic growth and hamper gains in corporate earnings, he said.

The fund climbed at an annual rate of 7.3 percent in the past five years, beating the 5.01 percent gain of 70 competing funds that invest in a combination of stocks and bonds, according to Chicago-based industry research firm Morningstar Inc. Only 8 percent of those funds have outperformed Federated Market Opportunity. In the past 12 months, the fund rose 4.1 percent, lagging behind the 5.9 percent advance of the U.S. benchmark Standard & Poor's 500 equity index.

Lehman has 10 times more money in cash than funds run by rival managers. Gold miners led by Denver-based Newmont Mining Corp. and Johannesburg-based AngloGold Ashanti Ltd. are his biggest stock holdings.

Shares of Newmont and AngloGold both dropped 13 percent in the past week as the price of gold declined from a 26-year high of $732 an ounce reached in May. The stocks are still up 6.8 percent and 21 percent, respectively, in the past year.

Low Risk

The Federated fund's cash is the highest since 2004, when about half of the assets were in money-market securities. Lehman's fund rose 5.5 percent that year, half the pace of the S&P 500.

Lehman changes the mix every year, making it difficult for investors who want consistent exposure to a specific amount of stocks and bonds, said Reginald Laing, an analyst at Morningstar. ``Still, Steve Lehman has an admirable record of preserving capital,'' he said.

The fund's Sharpe ratio is 0.76, compared with the average of 0.52 for similarly run funds, according to Morningstar. The greater a fund's Sharpe ratio, the better its risk-adjusted performance. The Federated fund has a three-star rating from Morningstar, the third-highest ranking.

`House Bear'

``I'm not a relative-performance manager,'' said Lehman, who oversaw funds at First Chicago Corp. before joining Federated in 1997. ``I care about the fund's absolute return after fees.''

Lehman, who has a fountain in his plant-filled office, enjoys gardening and tennis when he isn't working. He has a bachelor's degree in economics from Ripon College in Ripon, Wisconsin, and master's in public policy from the University of Chicago.

Lehman, known as Federated's ``house bear'' by his colleagues, said share prices are expensive after rising for three straight years. The average stock in the S&P 500 Index now trades at about 18 times earnings, up from 11.6 times earnings in 1988, the cheapest time to buy stocks in the past 20 years.

``These days you've got concerns about the housing market, the consumer, the government, the debt, and then there's the geopolitical risk,'' Lehman said. ``If you add all that stuff, it makes an even more compelling argument to be extraordinarily risk-averse.''

The U.S. economy expanded at a rate of 2.9 percent in the second quarter, down from 5.6 percent in the previous three months. Signs of a slump in the housing market prompted the Federal Reserve to keep interest rates unchanged at its Aug. 8 meeting after 17 straight increases since June 2004.

Put Options

Lehman is holding put options on the S&P 500 that allow him to sell the contracts at 1350 until December. The index closed on Sept. 12 at 1313.11, giving Lehman a profit of almost 40 points per option if the index stays where it is. The buyer of a put option bets the price of the underlying asset will fall below the pre-determined, or exercise, price.

Until two months ago, Lehman had more than 10 percent of the fund in Japanese stocks. He said he eliminated the stake on concern about an influx of money into the market from foreign investors, which usually precedes a drop in the stock market.

``I'm looking for exceptional opportunities, but it seems like every time I find one, I find something in the portfolio I want to trim,'' Lehman said.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at [email protected]

Last Updated: September 14, 2006 00:02 EDT