Florida Trend | Florida's Business Authority

Opportunities in Uncertain Times

The U.S. budget deficit is expected to hit more than $400 billion this year, low capital gains tax rates are set to expire in 2010 and the economy will be on the front burner for the next president. The bottom line for investors is that taxes are becoming a more important consideration. “It is a very active conversation that we’re having with our clients,” says L. Scott Merritt, senior investment officer and vice president at National City Private Client Group in Sarasota. “There are a lot of moving pieces.”

Money men
[Illustration: Tomasz Walenta/marlenastock.com]
Merritt and a number of other Florida investment advisers are advising clients to consider taking gains and paying capital gains taxes at the 15% rate before the end of the year — in case the new administration and

Congress change that tax rate early next year.

For many investors, of course, the problem is finding gains to realize. The major U.S. stock market indices have suffered double-digit losses so far in 2008. Many international markets are faring even worse. Last year’s high-flying China market is down more than 50%. Even Brazil, which continues to generate buzz, is off 14%.

For investors who can put aside their fears, though, it can be an attractive time to buy.

On the next few pages is some advice that Florida investment advisers were giving their clients in early September.

 Taking regular losses and gains gives you the opportunity to buy quality companies at reasonable prices.

L. Scott Merritt L. Scott Merritt
National City Private Client Group

Senior investment officer and vice president, Sarasota

Assets under management: $2 billion (Florida)

Minimum investment: $500,000 (emerging affluent) to $1 million

What he likes: Large-cap U.S. stocks, particularly in the industrials, materials and energy sectors. Merritt likes a basket of industrials and materials that will benefit as communities build and rebuild infrastructure. He’s a fan of the oil sector and sees utilities as a way to realize both appreciation and income.

What he doesn’t like: Telecom services, financials, healthcare and consumer discretionary stocks. He is less bullish on small-cap stocks and the international arena.

Tax strategy: Although his focus is long-term investing, Merritt says it is important to consider taking losses and possibly gains on a regular basis.

 We are advising our clients to consider taking capital gains this year.

Mary KnauerMary Biggs Knauer
First Guaranty Bank & Trust

Senior vice president, trust and investments, Jacksonville

Assets under management: $140 million

Minimum investment: Typically around $500,000

What she likes: Healthcare and information technology stocks. On the fixed side, Biggs Knauer is focusing on short- to medium-term (less than three years) bonds.

What she doesn’t like: Telecom and energy stocks, and she’s lukewarm on financials.

Tax strategy: She’s advising that since most investors will have tax losses this year, it’s a good time to balance the losses by locking in capital gains at today’s low rates.

 Whoever wins the presidency is going to walk into a situation that has a lot of positive factors.

Thomas H. RuggieThomas H. Ruggie
Ruggie Wealth Management

Founder, Tavares

Assets under management: $260 million

Minimum investment: Typically $500,000

What he likes: Financials, biotech, healthcare, technology and alternative investments (distressed real estate). For sector plays, Ruggie typically uses exchange-traded funds (ETFs) in order to mitigate risk. He favors large-cap growth over large-cap value, domestic equities over international, and small cap over mid cap.

What he doesn’t like: Oil, commodities, emerging market equities, particularly China. On the fixed-income side, Ruggie believes that interest rates will begin going up in 2009, so he’s focused on very short-term bonds. He believes high-yield corporate bonds currently offer more attractive net yields after taxes than highly rated municipal bonds.

Tax strategy: Ruggie believes that taxes will go up regardless of who wins the presidential election. He’s concerned that the capital gains rate could go up early next year and could be made retroactive to the beginning of 2009. He’s talking to clients now about whether they should lock in capital gains before the end of the year.

 The biggest thing that has to change is that housing prices have to stabilize.

Susan SprakerSusan S. Spraker
Spraker Wealth Management

Founder and president, Maitland

Assets under management: $50 million

Minimum investment: $500,000

What she likes: Financials, global real estate funds and small-cap exchange-traded funds. Spraker says that strong regional or national banks or brokerage firms are attractive, particularly those that pay high dividends though she warns that there’s always a risk that the dividend could be cut. Global REITs that focus on commercial or industrial real estate give exposure to U.S. and international markets. Small-cap stocks were the first to drop and will be the first to come back, says Spraker.

What she doesn’t like: “I’m staying away from buying energy, gold and commodities.”

Tax strategy: “Municipal bonds are attractive, and they will be increasingly attractive,” says Spraker, who adds that it is a good idea to buy individual issues rather than a fund.

 We believe in being passive investors, but we don’t believe in necessarily being indexers.

Michael DavisMichael H. Davis
Resource Consulting Group

Founder and CEO, Orlando

Assets under management: $1 billion

Minimum investment: Typically $1 million

Investing style: Davis sets the rules for portfolio rebalancing and uses sophisticated software to tell him when, for example, a certain sector is weighted too heavily because of gains or if it is time to buy a sector that has seen heavy losses. Davis also says that the silver lining of a down stock market is the opportunity to move assets to children or fix prior mistakes, such as moving assets from taxable to tax-deferred accounts or the other way around.

What he is buying: U.S. and international large-cap value stocks. Davis emphasizes low-cost investments, including Vanguard mutual funds and institutional funds from Dimensional Funds Advisors. On the fixed-income side, he likes short-term (one to two-years), high-quality bonds right now.

What he is selling: Early this year, he began trimming emerging market funds

Tax strategy: Davis, who says paying taxes on an investment later — or never — makes more sense in most cases. He emphasizes estate planning and charitable giving of highly appreciated investments.

 There are three areas that are screaming buys right now: Healthcare, financials and technology.

Clive CholertonClive Cholerton
Spectrum Assets (a division of United Capital Financial Advisors)

Managing director, Boca Raton

Assets under management: $100 million ($10 billion for United Capital Financial Advisors)

Minimum investment: Typically $500,000

What he likes: Cholerton’s focus for the healthcare and financial sectors is high-dividend distressed stocks. Top of the list in healthcare are pharmaceuticals such as Merck and Pfizer. For the financials, Cholerton says he likes JPMorgan Chase, Goldman Sachs and Merrill Lynch. For 2009, he’s looking to tech stocks in alternative energy, data storage and software.

What he doesn’t like: Oil and international equities

 There’s still pain to come in the banking sector.

Andrew MehalkoAndrew Mehalko

GenSpring Family Offices (an affiliate of SunTrust)

Chief investment officer, Jupiter

Assets under management: $15 billion

Minimum investment: $10 million

What he likes: Equities now make up less than 30% of the firm’s total portfolio — “the least amount of exposure we’ve had in public equities in the history of the firm,” he says. Mehalko recently invested $100 million in attractive assets purchased from banks that are being forced to sell to meet capital requirements. Those include delinquent mortgages too big to be sold to Fannie Mae, Freddie Mac or HUD, which he is selectively buying for 40 cents to 60 cents on the dollar. He’s also buying senior capital structure bank loans at a discount and is lending to small, middle-market companies having a hard time getting bank financing.

What he doesn’t like: S&P 500 overall; Asia in general, particularly China, but he does believe that Japan’s equity market will be one of the first worldwide to rebound; high-yield debt; commodities.

Tax strategy: Don’t trade tax efficiency for investment returns, Mehalko says. Municipal bonds offer some appeal, but there’s no reason to rush in. Master limited partnerships (typically in the energy field) can be tax-efficient.

 Don’t be fearful of making portfolio changes because of taxes.

Adam CarlinAdam E. Carlin

Bermont/Carlin Group with Smith Barney

Director, wealth management, Coral Gables

Assets under management: $1.6 billion

Minimum investment: $2 million

What he likes: Municipal bonds, but purchased carefully. In Florida, where there is no state income tax, a 4.5% muni bond is the equivalent of a 6.92% taxable yield for someone in the 35% tax bracket, Carlin says. He also likes master limited partnerships, which are typically in the energy field with some in the entertainment industry, because only 25% to 30% of distributions are taxable.

What he doesn’t like: Mutual funds in taxable accounts because of capital gains distributions. Carlin also warns about buying funds close to the distribution date at the end of the year.

 This is not an end-of-the-world environment that we’re in.

Greg Walker

J. P. Morgan Private Bank

Managing director, Florida investments, Palm Beach

Assets under management: $440 billion (globally)

Minimum investment: $25 million but can vary

What he likes: In July 2007, Walker began raising cash for his moderate-risk clients, building cash positions to 20% instead of the typical 2% to 3%. This past January, he began investing that cash in distressed credit instruments, first to leveraged loans and mezzanine debt and more recently in high-yield corporate bonds and distressed debt hedge funds. The private bank also recently began adding U.S. stocks back into portfolios, using an S&P 500 exchange-traded fund.

What he doesn’t like: “We’re staying away from Europe,” says Walker, explaining that potential wage pressures on companies as well as housing bubbles in England and Spain are two strikes against the region. He’s also staying away from investments in the euro. He expects the dollar to continue to strengthen in the short term.

On the financials: Walker says the private bank doesn’t like financial equities at this time, but it is looking at investing in one of the few private equity firms that specialize in financials.

Tax strategy: Tax legislation will likely be on the agenda no matter who wins the November election, Walker says. Some hedge fund investments could become less attractive to taxable investors because they often generate more short-term capital gains than other funds. On a selective basis, he likes municipal bonds. The private bank, which works with portfolio managers around the world, is looking at additional ones who use tax-sensitive screening.