Uncertainties in the stock market make it hard to assess risk and forecast safe havens — will this be the year that interest rates start to rise and devastate returns for fixed-income investors? With unprecedented low interest rates, history is not necessarily indicative of future performance, and even the most brilliant investors are cautious.
But with uncertainty comes opportunities. While wealth managers around Florida are pursuing various strategies, a common theme remains diversification and selection of an approach tailored to an individual investor’s risk tolerance.
Here is what some Florida wealth managers are advising.
Al Bhatt looks at the markets and sees land mines. “We’re in a very volatile environment, and I believe it will persist for some time,” he says. “Because of broad uncertainty and because of equity volatility, we need to be even more thoughtful.”
Bhatt advocates a well-constructed portfolio of European and Asian equities. “We need to look for leading global companies whose stock prices are selling at a discount” — companies like Roche Holding, Nestle and Philips Electronics, he says.
Bhatt believes Europe could see a recovery beginning as early as 2014, creating an opportunity for the short term. “We’ve identified a few strong (fund) managers who have a successful track record investing in international equities and we’re looking to them to get returns.”
The second part of Bhatt’s strategy is focused on the bond market. He advises clients against making or increasing their investment in U.S. bonds. “At this stage, that’s a wrong move because the Federal Reserve and the European Central Bank have to keep rates low for the foreseeable future.” The exception: Floating rate bonds. “These are more senior bonds with higher credit quality, and they float. When the rates rise, the rate on the bonds will increase.” He sees opportunity in global market bonds. Over the long term, emerging markets will improve faster than developed markets, he says. He also feels there is a higher yield opportunity in emerging market bonds as well as an opportunity to capture currency appreciation by investing in local currency bonds.
Next page: Pat Dorsey, Director of Research / Sanibel-Captiva Trust, Tampa Bay Trust, Naples Trust
Safety is expensive now, says Pat Dorsey. Traditional safe havens such as treasuries, utilities and investment-grade bonds are not good choices at this time, he says. “We haven’t bought bonds for a client in a year or more.” Historically, bonds have performed well, but that’s what makes them risky today, he says. “It’s impossible for them to return in the next decade what they did in the past decade.” Going forward, the return on bonds won’t keep up with inflation, and this puts investors at risk of falling short of their retirement goals, he says. “You will lose purchasing power every year, and that’s not good investing in my view. That’s risky.”
For investors looking for income, Dorsey suggests dividend-paying equities, master limited partnerships and other alternatives. He advises clients to buy equities that yield 3.5% with income streams that grow. He also has created a bond alternative — a portfolio of master limited partnerships that own energy infrastructure and debt-like investments such as trust preferred securities. REITs, he says, are too expensive. “We wind up creating a portfolio mix that has lower volatility while proving better yields and more income growth,” he says.
“Right now, for our growth and income strategy, we’re at about 70% equities, 30% high-income generating assets.”
Dorsey advices clients to stick with a strategy that suits their risk tolerance. “It’s much better for investors to have a path they can stick with even if it’s not the highest returning plan than force them into a plan that they may bail out of at the wrong time,” he says. “Any good wealth adviser understands that part of our job is to help people act with their heads and not their stomachs.”
Next page: Joe Keating, Chief Investment Officer, CenterState Bank
Joe Keating likes dividend stocks. “They are defensive in nature,” he says. He points out Coca-Cola as an example. “Even if the stock price goes down, that dividend payment supports the price.” And even more, he says, a drop in price presents an opportunity to buy more Coca-Cola stock. “It’s a beautiful way to build wealth over time.”
Dividend stocks do not rise as much when the market goes up, but they tend not to fall as much when the market falls, which is why Keating believes they’re a good way to grow income over time. “Our holdings grew 6% last year.”
However, he warns, very high yields usually signal something bad. “You want solid dividend payers,” he says.
Some of Keating’s favorites are Clorox, 3M, AT&T, Consolidated Edison and Walgreens.
Keating says there is no right or wrong for how much of a portfolio to allocate to dividend stocks. He has a 70-year-old client who has 85% of her investments in dividend stocks. “It’s her choice. It’s all a matter of what someone can be comfortable with at night. “
Next page: Eli Butnaru, CEO Mora Wealth Management of Miami
Eli Butnaru’s investment strategy this year is to be cautious. “The main thing we’re doing for our clients is looking at ‘how do we protect capital,’ ‘how do we not lose money.’ ” For that reason, he is wary of investing in small U.S. companies and is particularly careful about U.S. fixed income, where he believes there’s a higher risk of losses if the market perceives that the Federal Reserve is changing its current monetary policy. He also is staying away from investments in Europe.
Instead, he sees opportunity in Asia, particularly in Vietnam and frontier countries that are starting to develop.
With U.S. stocks, Butnaru is advising clients to buy energy and health care equities. “We do not purchase individual names in those sectors,” he says. “We try to look for those managers that on a risk-adjusted basis provide the best return.”
He’s also bullish on bank stocks, not because of their earnings potential but because he foresees mergers and acquisitions leading to higher stock prices. “I think there is opportunity.”
Butnaru says he is neutral on high yields (junk bonds). However, he believes there will not be as many defaults as in the past. “If a bond gets 4% to 5%, that will help with income in a portfolio. The key is to find the right manager who can manage quality high yields.”
Butnaru says global investors “need to know that the safest places to invest may not be as safe as they used to be. What has performed well in the past five years might not in the next five years.”
Next page: Jack Kuhn, enior Vice President, Managing Director for Florida West Coast BMO Private Bank
While the odds are against a major bond market collapse this year, Jack Kuhn advises his clients to temper their expectations and consider moving away from fixed income. “We believe inflation is inevitably coming, and it will decrease the value of fixed-income holdings.” If clients insist on staying in bonds, he prefers they move into convertible bonds that can be turned into equities.
The retreat out of fixed income doesn’t need to be overnight, he says. It could happen over 18 months to two years. But he believes those who act now, ahead of the curve, will find attractive alternatives. Many clients already have begun to shorten the duration of the bonds in their portfolios, he says.
On the stock side, Kuhn advises reducing international stock exposure in favor of large domestic stocks: “Where the currency is trading in premium to the dollar, an international stock may not be as attractive an investment. Even if the stock moves, if the currency moves against us, you’re back at same place.”
He believes the S&P 500 is near full valuation, which makes good stock picks more challenging. He’s advising clients to hold onto their equities but says they will need to be monitored and managed carefully throughout 2013 to determine whether to continue to hold or sell.
Kuhn also recommends diversifying into other income-producing investments such as preferred stock, REITs and master limited partnerships. For investors interested in buying gold, Kuhn recommends gold-mining stocks.