Steve McKee's fund newsletter has delivered solid results for more than 20 years and has done so with well-below-average risk. Can he keep it up? By Steven Goldberg, Contributing Columnist August 22, 2012 Investment tout sheets are a dime a dozen -- and most of them aren't worth even that much. It's a lot easier to peddle often-dubious advice to the unwary than to actually make money investing. And many newsletters -- online and off -- manage to put up a good year or two before losing their touch.SEE ALSO: Kiplinger's Guide to Income Investing But I think I've found a worthy investment newsletter in No-Load Mutual Fund Selections & Timing. According to the authoritative Hulbert Financial Digest, which tracks investment newsletters, Steve McKee's letter has posted the top risk-adjusted returns of the newsletters Hulbert tracks since it began following McKee at the start of 1990. It ranks number two during the past five and ten years on a risk-adjusted basis. Adjusting for risk takes into account an investment's volatility as well as its raw performance. Risk adjustment is important in evaluating McKee's letter because it has slightly trailed the Wilshire 5000 index, the broadest measure of the U.S. stock market, since 1990. The letter's recommended portfolios have, on average, returned an annualized 8.4%, while the Wilshire has gained 8.6% annualized (unless otherwise noted, returns are through July 31.) Advertisement I wouldn't scoff at risk-adjusted returns, however. Countless studies have shown that they have far more predictive value than raw returns. McKee's newsletter seeks to hold down risk. Indeed, his portfolios tend to be so conservative that you might consider tweaking them a bit to add a little zip. McKee has steered his readers in the right direction in good markets and bad -- but he has really excelled in bear markets. During the catastrophic 2007-09 bear market, McKee's portfolios lost just 11.6%, on average. (Hulbert's data, based on monthly returns, doesn't coincide precisely with the bear market; it covers the period from September 30, 2007, through February 27, 2009, during which the Wilshire 5000 plunged 38.8%.) Over the past five years, the letter returned an annualized 6.4%, compared with 1.3% annualized for the Wilshire. How does McKee do it? From his perch in Plano, Tex., the 55-year-old former stockbroker gives readers advice on which funds to invest in -- and how much to keep in cash. His advice in both fund selection and market timing has added value, the Hulbert digest says. But his fund selection has added the most value. For people who try to learn every fact and figure about a mutual fund before investing -- I put myself in that category -- McKee's success is disheartening. That's because McKee looks at just one measure: a fund's risk-adjusted returns relative to other funds. Advertisement McKee thinks there's no value in getting to know fund managers, learning their investment techniques -- or any of the other tools of fundamental fund analysis. "I don't care what the expense ratio is, what the prospectus says, how long the manager's tenure has been, or even how good the fund has been under that manager," he says. McKee won't provide details on precisely how he picks funds. But it's clear that his methodology is pretty simple. He has one number that sums up a fund's recent returns and another that looks at its volatility. He combines the two numbers to get what he calls a "C" ratio, or "comet" score. The higher the "C" the better. He buys a fund when its ranking is in the top 5% of his somewhat arbitrary universe of 800 funds; he typically sells when a fund drops out of the top 20% depending upon taxes and short-term trading rules. On average, he figures, he holds funds close to 12 months before selling. A number of other newsletters invest in funds exclusively or almost exclusively based on their relatively recent past returns. NoLoad FundX is probably the best-known of these. Hulbert ranks it number five since the start of 1990 on a risk-adjusted basis. McKee is risk averse nowadays because he believes we're in a "secular" bear market for stocks -- that is a major, multiyear downturn. He believes the secular bear market began in 2000 and is likely to last about 15 years -- which means it won't end for roughly another three years. Consequently, even his "aggressive growth" portfolio is filled with low-risk funds, several of which invest in both stocks and bonds. On top of that, he has half of his portfolio in cash, which essentially earns nothing. Advertisement He monitors a number of indicators to determine what percentage to invest in stock funds. These range from U.S. fiscal and monetary policy to the technical health of the market. Currently, three of his indicators are bullish, two are bearish and seven are neutral. McKee's newsletter offers three portfolios: aggressive growth, growth and balanced. All three contain many of the same funds but in different proportions. If I were a subscriber, I'd use the aggressive-growth portfolio -- and I'd keep less than his prescribed 50% in cash. That's because the portfolio includes three balanced funds -- Hennessy Balanced (symbol HBFBX), FBR Balanced (AFSAX) and Aston/Montag & Caldwell Balanced (MOBAX) -- all of which contain a hefty slug of bonds. An important caveat: All newsletters, even good ones, go through bad patches. If you subscribe, resolve to use McKee's newsletter for at least a couple of years. Subscriptions are $180 annually or $39 for a three-month trial. If you're interested, why not start with a three-month trial to see if the approach works for you? Visit the Web site at investmentST.com or call 800-800-6563. Steven T. Goldberg is an investment adviser in the Washington, D.C. area. Kiplinger's Investing for Income will help you maximize your cash yield under any economic conditions. Download the premier issue for free.