The following introduction article appeared in
the September/October 2002 issue of...
The MoniResearch Newsletter

Brian R. Carruthers & Associates

I'm pleased to introduce Brian Carruthers, an independent, fee-only money manager. During our interview, I came to learn that Carruthers is a straight talking man who speaks his mind. I personally found it satisfying that his words and thoughts are so genuine.

Growing up in a family with five children, there came a time when Carruthers learned it would be difficult for his parents to cover the costs of attending college for all five children. Determined to get a college education, Carruthers had to scramble to come up with the money himself. Sometimes he was able to work and attend college simultaneously, but there were also times when he was forced to leave school and take a full time job until his capital was replenished. Some jobs: bill collector, police dispatcher, rental car agent, and re-stocking snack trays at roadside attractions. ("You got paid according to how many places you serviced, and I really hustled!") As a bill collector pursuing delinquent debtors through southern Florida, Carruthers painted some colorful vignettes for me; but this newsletter is not the place - you can ask him yourself.

I always ask a money manager to identify the seminal event that steered his thoughts toward investing and money management, and Carruthers' story was amusing: "When I was a kid in Connecticut, I had a friend who worked on a farm driving an Allis-Chalmers tractor. He was so fond of it that he bought stock in the company. That's the first time I realized that someone could make money by investing it."

From odd jobs, including a paper route and mowing lawns, Carruthers saved his pennies and eventually accumulated $500. Using a stock charting service, Carruthers began studying stocks in earnest. The two candidates highest on his list were Campbell Soup and Polaroid. In 1974 he decided to take the plunge and selected Polaroid. When he closed out the trade, Carruthers had nearly doubled his money. He recalls his emotions at the time: "That whetted my appetite for more."

After graduating form the University of Florida with an Accounting degree in 1983, Carruthers took a job with a small, local tax accounting firm: "It wasn't much fun but it paid the bills." While employed there, he obtained his Series 7 stockbroker's license in 1985 and then moved on to join Prudential Financial. At that time, Prudential was attempting to bridge their insurance and securities operations, and Carruthers believed that this initiative might offer important and challenging opportunities. However he found himself in a dead end job selling insurance, and he decided that was not the career path he had envisioned.

After sending out numerous resumes, Carruthers accepted a position with a financial planning firm in San Diego. For the next four years he worked with the firm's clients, and gradually came to realize that his passion was money management. Carruthers recalls: "I started out as a fundamental analyst but then I became technically oriented. From watching the markets, technical analysis simply made more sense to me - I observed trends, I'm good with numbers, and I wanted to try to find a way to always be on the right side of the trend."

After Carruthers acquired computer based model development software, he began the research process that culminated in the three portfolios he is still using today. (Inception dates in parentheses):

• Managed Income Portfolio (4Q90)
• Income & Growth Portfolio (1Q95)
• Momentum Portfolio (3Q01)

The oldest portfolio, Managed Income, with a 12 year track record, was an accident according to Carruthers. He explained to me that it evolved out of the crash of '87: "After the crash, people were afraid of equities. The (financial planning firm in San Diego) wanted me to come up with a pure bond portfolio and so I did."

The portfolio uses all bond categories. Possible holdings can include high yield and investment grade corporate bonds, and government bonds of short-term, intermediate-term and long-term maturities. Like all Carruthers' portfolios, the underlying principle is trend following. But the portfolio also takes into consideration the relative performance of each bond sector and Carruthers then uses judgment in making the final allocation among bond sectors. Responding to my comment about the use of judgment, Carruthers replied: "Managing money is an art, balancing risk and reward." As this is being written, he reports that this portfolio is 50% invested in intermediate-term governments, and 50% in short-term, investment grade corporate bonds.

The auditor's report for this program showed that over the last ten years, it had never suffered a drawdown, measured on a quarterly basis. However, the auditor's figures were before fees. After deducting fees, I found that the worst drawdown was -0.4% in 4Q94. Coupled with decent returns (the compound annualized rate of return for the last 10 years is 9.4%; last one year: 6.6%, net of fees), skittish stock market investors may consider this program an attractive alternative to equities.

Speaking of the stock market, I asked Carruthers for his opinion about where the market stands today and where it might be headed. He replied: "We are close to ending the first leg down of this secular bear market and may have already seen the lows for this leg. Then I look for a hell of a rally lasting a year or so - enough to entice the investing public back into the market, and then drag them down again. I look for the second leg down to end between 5000-6000 on the Dow, and around 500 for the NASDAQ."

At the end of 1994, and realizing that the shock of the crash of '87 had pretty much been forgotten by investors, Carruthers developed his Income & Growth portfolio in order to introduce equity exposure into the picture. But he nevertheless characterizes the portfolio as very conservative, and notes that its maximum allocation to equities is only 40%. On the other hand, it can be 100% in bonds when market conditions warrant. As might be expected, both the returns and the risk (Ulcer Index) are higher than Carruthers' Managed Income Portfolio. The Income & Growth Portfolio earned a compound annualized rate of return for the last five years is 6.2% net of fees.

And finally, that brings us to Carruthers' third and latest creation, his Momentum Portfolio, focused exclusively on equities. For the one year this program has been operational, returns net of fees:

• 3Q01 -0.3%
• 4Q01 +3.4%
• 1Q02 +3.8%
• 2Q02 -0.2%

When one considers how the popular averages have performed during this period, these numbers reflect the proper perspective. Naturally I inquired whether these results incorporate trading the short side of the market. Carruthers replied: "They do not - I don't like being short. However, there is nothing preventing me from going short."

This Momentum Portfolio is true dynamic asset allocation. Carruthers monitors 30 fund sectors (examples: international, gold, large caps, small caps) and looks for positive momentum in each sector. From the best performing sectors Carruthers then looks for the best individual funds based on their relative strength, chart patterns, and Sharpe Ratios.

Carruthers became a Certified Financial Planner™ (CFP®) in 1988, and a Chartered Market Technician^SM (CMT^SM) in 1992. He joined the Market Technician's Association in 1986, and was one of the founders of its Southern California chapter where he rubs shoulders with famous technical analysts at chapter meetings. Carruthers is a NAAIM member (National Association of Active Investment Managers), the professional society of active managers.

The minimum account is $250,000. For accounts over $1 million, Carruthers offers to customize portfolios to better achieve the investment objectives of individual clients.