Injustice in the U.S. Justice System

By CAROL E. LEE and JULIAN E. BARNES

A group of Americans who have been prohibited by Egypt’s ruling military from leaving the country have taken refuge at the U.S. Embassy in Cairo in the midst of an Egyptian crackdown on pro-democracy and human-rights organizations and their staff.

Defense Secretary Leon Panetta called the head of the Egypt’s ruling military council over the weekend to urge the lifting of the travel restrictions, while midlevel U.S. officials planned to press their concerns with a group of senior Egyptian military officers who landed in Washington on Sunday to try to mend the rift with the U.S.

The Egyptian government is investigating funding of local NGOs, part of a campaign by some officials to halt foreign support for civil-society groups that may be critical of Egypt’s government.

White House press secretary Jay Carney confirmed that U.S. citizens were staying at the embassy, but didn’t say who, or how many people. “We’re not aware that they’re in any danger,” Mr. Carney said. “These are citizens who have been told they cannot leave Egypt.”

Sam LaHood, director of the Egypt office of the International Republican Institute and son of Transportation Secretary Ray LaHood, is among those who have been told they can’t exit Egypt.

Mr. LaHood declined to comment on his whereabouts, referring questions to IRI’s Washington headquarters, which didn’t respond to requests to comment.

Julie Hughes, the head of the National Democratic Institute Cairo office, who also faces a travel ban, said no NDI staff had taken refuge at the embassy.

State Department spokeswoman Victoria Nuland disputed reports that the Americans were looking to avoid possible arrest.

“There is no expectation any of these individuals are seeking to avoid any kind of judicial process,” she said, adding that U.S. groups in fact encourage adherence to legal processes in countries in which they work.

The U.S. Embassy invited “a handful” of Americans to stay at the embassy, she said. “This was a unique situation.”

As part of the U.S. response, Mr. Panetta urged military council leader Field Marshal Hussein Tantawi to lift the ban on travel by Americans who wish to leave the country, said Pentagon press secretary George Little.

Mr. Little said Mr. Panetta expressed concern over the restrictions placed on nonprofit organizations operating in Egypt. The call, placed over the weekend, was at least the second Mr. Panetta has placed to Field Marshal Tantawi to express concern over Egypt’s pressure on pro-democracy groups. The last such call was Dec. 30.

Congress is considering cutting the $1.3 billion a year in U.S. military assistance to Egypt.

Midlevel U.S. officials also planned to press their concerns. Officials in Washington said the Egyptians’ trip was planned before the standoff over the U.S. pro-democracy workers.

On Monday, the delegation visited Tampa, Fla., for meetings with the U.S. military’s Central Command. The Egyptian officers will be in Washington on Wednesday to meet with military and diplomatic representatives, and are supposed to meet with U.S. lawmakers.

Neither Mr. Panetta, who is due this week to leave for meetings in Europe, nor Gen. Martin Dempsey, the Chairman of the Joint Chiefs of Staff, are scheduled to meet with the Egyptian officers.

In addition to meetings at the Pentagon, the Egyptian delegation is scheduled to meet with State Department officials and members of Congress.

Ms. Nuland said the Egyptians would hear U.S. concerns clearly when they reach Washington.

“You can be assured that in every meeting they have with the administration, and I would venture to guess in every meeting that they’re going to have with Congress, that this situation will come up,” she said.

U.S. officials have been trying to remain hopeful about changes in Egypt since the government of former President Hosni Mubarak fell last year. “There are challenges that remain, but it’s important to remember that Egypt has come a long way,” Mr. Carney, the White House spokesman, said Monday.

—Matt Bradley contributed to this article.

By SAM MAMUDI

For at least a generation, financial professionals have urged mutual-fund investors to put more money in stocks than in bonds. The logic: Stocks power a portfolio, while bonds provide some protection.

Now some pros are questioning that conventional wisdom. After last year’s stock crash, and ahead of a potentially weak economic recovery, they’re arguing that bonds and alternative asset classes such as commodities deserve more weight.

Sure, the Standard & Poor’s 500-stock index ended August up 51% from its March low, for a 13% return for the year to date (before sliding 2.2% yesterday). But that spurt has left stocks far less cheap than they were a few months ago. And at least for the next several years, these pros say, stocks are unlikely to return to their previous highs especially if a slow recovery restrains growth in corporate profits. Even if stocks deliver higher returns over time than bonds, the difference may not be large enough to justify the often higher volatility of stocks.

What’s more, the classic 60-40 split between stocks and bonds the formula that many balanced funds use to allocate investments ignores alternative asset classes that can deliver returns with different levels of risk.

“The whole 60-40 idea is almost like Betamax videotapes it’s now passé,” says Andrew Silverberg, co-manager of Alger Balanced Fund. “It gained popularity while we were still in a bull market.”

Asset allocation should be “more dynamic,” Mr. Silverberg says. “There are a lot of opportunities on the other side of the balance sheet,” he adds, referring to corporate bonds. Earlier this year, Alger Balanced’s stock allocation was 48%, though it has since increased to about 56%.

Gibson Smith, co-chief investment officer at Janus Capital Group and co-manager of Janus Balanced Fund, doesn’t stick with the 60-40 formula either. “We’re not just about driving returns, but also preserving capital,” he says.

Late last year, Janus Balanced held 60% bonds and 40% stocks. While a 60-40 split between stocks and bonds is the nominal default of the fund, “we like having the flexibility” of ignoring that standard based on risk-reward profiles, says Mr. Smith. As of July 31, the fund was 55% in stocks and 45% in bonds.

Bonds on Top

Even with the recent climb, stocks definitely haven’t been pulling their weight over the past year or two. The S&P 500 is still down 30% since Dec. 31, 2007. Bonds have fared much better: The Barclays Capital U.S. Aggregate Bond Index is up 10.1% over the same period.

Bond investors are also ahead of stock investors over the past five and 10 years challenging the view that stocks beat bonds over longer periods. Over the past five years, the S&P 500 returned an average 0.1% a year, while the Barclays bond index returned an average 5%. Over the decade, the stock measure fell an average 3.7% a year, while the bond gauge returned an average 6.3%.

Historically, meanwhile, stocks have had higher highs but much lower lows than bonds. In their best year in the past half-century, 1975, stocks delivered a 37% total return but they fell 37% in their worst year, 2008. By contrast, the best year for bonds was 1982, when they produced a 36% total return, while their worst year was 1999, when they fell 6%.

As for alternative investments, the Reuters/Jefferies CRB Index, the oldest global commodities index, has annualized total returns of 1.5% over the past five years and 8.6% over the past 10 years. The MSCI Emerging Markets Index is up just over 50% this year, and has five- and 10-year annualized total returns of 17% and 10.4%, respectively.

MarketWatch’s Sam Mamudi asks New Yorkers how often they review their stock and bond allocations and whether they adjust their portfolio according to market conditions.

One of the loudest critics of the idea of investing heavily in stocks for the long run is Rob Arnott, chairman of money manager Research Affiliates in Newport Beach, Calif. Mr. Arnott, a veteran financial analyst and market pundit, recently wrote an article for the Journal of Indexes that highlighted that bonds have outperformed stocks over long stretches. Mr. Arnott found that from February 1969 through February this year, investors in 20-year Treasurys, rolling to the nearest 20-year bond and reinvesting the income, would have beaten investors in the S&P 500 a 40-year record of bonds beating stocks.

Mr. Arnott says the 60-40 balanced-portfolio theory took hold following the stock market’s rocketing growth from 1949 to 1965, which gave investors the “incorrect idea of placing stocks at the center of our investing universe.” During that 17-year period, annualized returns for the S&P 500 were 16.3%, while bonds rose 1.9% a year.

Over the past 200 years, Mr. Arnott says, stocks have beaten bonds by 2.5 percentage points a year but half of that advantage comes from the 1949-1965 period. He believes last year’s losses should be a wake-up call for investors to reduce stock allocations and more broadly diversify.

“There’s no single answer” to the question of how a typical investor should allocate assets, Mr. Arnott says. But he adds that most investors should put at least 20% into alternatives.

Since 2006, Mr. Arnott has been generally reducing the stock exposure in the Pimco All Asset fund he subadvises for Pacific Investment Management Co. While he increased his stockholdings earlier this year, the rally saw him sell once more. As of June 30, the fund was about 9% in stocks and convertibles, 37% in corporate bonds and 54% in alternative assets, including 25% in Treasury inflation-protected securities, or TIPS. According to Morningstar Inc., the fund is up 16.3% so far this year and has annualized returns of 4.4% over the past five years.

“We have a very cautious, i.e., negative, view on growth stocks,” Mr. Arnott says, and he notes that those shares dominate standard market benchmarks such as the S&P 500, which weight stocks based on their total stock-market value. On the bond side, Mr. Arnott has concerns about a resurgence in inflation; he suggests TIPS, as well as shorter-duration and lower-grade bonds.

For investors with a heavy stock exposure, “this is the perfect time to move elsewhere,” including alternative assets such as commodities, Mr. Arnott says. “But a lot of folks will follow that conventional path of 60-40 and I think that’s a mistake.”

‘It’s Just Ridiculous’

Other managers agree. “Any kind of strict percentage allocation doesn’t make sense,” says Steven Romick, manager of FPA Crescent Fund. “It’s just ridiculous.” FPA Crescent, which has a go-anywhere mandate, is about 38% in stocks, 28% in corporate bonds and 7% in shorts; the rest is in cash, waiting to be deployed.

Mr. Romick sees corporate bonds as more attractive than stocks in the current market. With stock prices at historically average valuations following the rally, “you’re not getting paid enough to play,” says Mr. Romick, adding, “growth’s not going to be great for a number of years.” The fund is up 18.2% so far this year.

James Shelton, chief investment officer at Houston-based wealth manager Kanaly Trust, says his firm reduced its stock exposure in favor of both bonds and alternative investments such as energy and commodities in the past year. His firm sees stocks returning 5% a year over the next seven years but is not more heavily into bonds because of inflation fears.

Mr. Shelton, whose firm manages about $2 billion, says that clients have not questioned the pullback in stock exposure. Some aggressive portfolios had as much as 80% in stocks, Mr. Shelton says, and those levels have been reduced to 50%. For balanced accounts, he says he’s splitting assets evenly among stocks, bonds and alternatives.

“A lot of people who said they wanted to be aggressive [in investment approach] realized last year that they weren’t comfortable with that,” he says, adding that he increased some investors’ stock allocations in the first half of August.

Stay the Course?

Still, many financial pros continue to believe that stocks should be the biggest element of a long-term portfolio. Ned Notzon, chairman of the asset-allocation committee at T. Rowe Price Group Inc., believes stocks will generally beat bonds over long time periods. And he says it’s hazardous to try to sidestep periods of weak stock performance and then heavily invest in shares in the good times.

For investors with long-term time horizons, such as a far-off retirement, he says, “It’s a bad idea to underweight stocks because you think you’re in an economic crisis and you’ll get back before there’s a recovery.”

Mr. Notzon is also cautious about bonds “because of the inflation question.”

T. Rowe Price’s asset-allocation group sets portfolio allocations for the firm’s three target-risk funds and 12 retirement funds, typically based on the outlook for the next six to 18 months. The current allocation is overweighting stocks by five percentage points, meaning that in a traditional balanced portfolio the weighting would be 65% in stocks and 35% in bonds, Mr. Notzon says. The stock figure has varied by a few percentage points in recent years, though typically it has stayed overweight.

But the fund industry does seem to be moving in the direction of offerings that focus less on stocks. Rather than the old balanced-fund format, some fund firms are launching tactical allocation funds similar to Mr. Arnott’s Pimco All Asset, says Russ Kinnel, director of mutual-fund research at Morningstar.

“There is a growing class of tactical allocation funds that have little to do with balanced strategies because they really have every asset class at their disposal and are making active shifts into those classes,” says Mr. Kinnel. For instance, Legg Mason Permal Tactical Allocation, which launched in April, held about 30% in stocks as of July 31. Mr. Kinnel also points to Goldman Sachs Income Strategies, which reverses the traditional balanced-fund approach by aiming for 60% bond holdings and 40% in stocks.

–Mr. Mamudi is a reporter for MarketWatch in New York. He can be reached at sam.mamudi@marketwatch.com.

By DENNIS NISHI

Social networking can be a powerful tool for small businesses looking to grow. But for some start-ups, it’s more than that: Social networking is the basis for the business.

Take Brent Hieggelke and his wife. Three years ago, the couple decided to rent their vacation home in Mt. Hood, Ore., but worried about letting strangers on the property. That’s when Mr. Hieggelke decided to use social networking to screen tenants.

He created a Facebook app called Second Porch that keeps dealings between friends. Users post their property availability, and the listings stream in their friends’ news feeds. Friends can also make recommendations about prospective tenants and properties.

“Every person probably knows 10 people that have vacation homes and even more than that are interested in renting. That amounts to a lot of vetted choices,” says Mr. Hieggelke.

Within a year, Second Porch attracted more than $1 million in investment funding, which Mr. Hieggelke used to set up an independent website that worked with the app but offered more features. The site drew more than 16,000 listings—and caught the eye of another rental service, HomeAway, which acquired Second Porch five months ago.

Friends of Friends

Entrepreneurs who build their businesses and websites around social networking say it offers a big advantage: Customers get unusually engaged with the business, sharing favorite products and services with friends and often turning them into buyers, too. In the best cases, entrepreneurs say, customers see the business as a kind of social activity in itself, interacting with other customers and making recommendations that will stream on the Facebook news feeds of all of their friends.

James Yang

Yardsellr.com has built its entire business around its customers’ chats about products. The San Francisco start-up lets Facebook users sell products to people with similar interests. Members join groups, or “blocks,” representing their niche interests, from “Star Trek” collectibles to guitars to purses. When a member lists an item for sale, it shows up in the news feed of other people that have subscribed to those blocks and allows them to participate in ongoing conversations.

The comments on those listings “are where all the action happens,” says founder and Chief Executive Danny Leffel. “More than 100,000 followers regularly comment on products that they love, and that creates entertainment value that can also promote educated purchasing decisions.”

Members then follow links back to Yardsellr’s own site to make their purchases. The company makes money from a buyer’s fee and from optional marketing services available to sellers. The company is private, so Mr. Leffel won’t disclose any financials, but he does say that Yardsellr has 3.9 million members and is adding more than 20,000 new ones every day. Its parent, YellowDog Media Inc., recently launched a similar site called Style.ly that focuses on clothing.

Bringing It Back Home

Facebook won’t disclose how many companies are combining its core features with commerce. But a spokesperson says that more than 7 million apps and websites are integrated with the social network, allowing visitors to do things like share a site’s content with their Facebook friends. And most social-networking sites, including Linkedin, Twitter and even YouTube, offer similar abilities.

Small companies have never had this level of customer access or ability to track behavior, says Charlene Li, founder of Altimeter Group, an advisory firm in San Mateo, Calif. “You know their names, what they might like and so much more than you did before,” says Ms. Li. “That kind of knowledge can help you accelerate a new business because you understand what customers want and need.”

But companies need to tread carefully, she says. When businesses bring customers in so close, they need to forgo the hard sell—or else risk alienating those buyers and others in their networks. They also need to be extra responsive to requests and complaints across all social-media channels, especially if they are made in public forums.

That may mean having staff members dedicated to the job, Ms. Li says. Companies can’t simply hand the task off to “a junior person…who is snarky to customers.”

Mr. Nishi is a writer in Los Angeles. He can be reached at reports@wsj.com.