“How long does it take,” she asked, “for us to get back to where decisions are driven by greed and a desire for double-digit returns?”
“I think it gets down to knowing your client and having that tough discussion with them,” said Steve Toomey. “Yeah things have changed, but hopefully, if the planning process you were doing was correct, you were targeting a rate of return that allow your clients to get where they wanted to get.”
Steve Soden observed that many companies were sitting on so much cash they didn’t know what to do. What they are not doing is earning money on it. Their hesitance is due in no small part to the fact that stocks are yielding more than the investment-grade bonds. “It’s crazy,” said Soden.
International Investments
UMB is exploring the world. “We think it’s critical to have international exposure and a robust asset allocation,” said K.C. Matthews. In the early 1990s, he noted, investors assumed that emerging markets were inherently risky. Today, several such markets have fast-growing economies, low debt levels, and rich currency reserves, all of which are favorable indicators.
“Clients want to be more informed about international investing,” affirmed Lana Maudlin. Given the evolution of the market, her firm is no longer looking at international as an asset class, but is instead evaluating different asset allocations within international.
“It doesn’t matter where the company is headquartered,” said Steve Toomey. “We are seeing more managers in the mutual fund world and the institutional world actually taking a global approach as opposed to taking a U.S.-vs.-everyone-else approach.
“I think also the lines of what is international have also been blurred a little bit,” elaborated Adam Bold. He cited companies like Heineken, which are headquartered abroad but sell most of their product in the United States. He cautioned, however, that over-exuberant evaluations may lead investors into markets that have already matured.
Kelli Glynn expressed a few cautions as well, among them different accounting standards overseas, different GDP calculations, and the looming potential for another asset bubble. “There are substantial risks still in many of these countries,” she noted.
Given currency instabilities, especially that of the United States, Matthews argued for a balanced portfolio that includes “non-dollar denomination assets,” whether bonds or equities.
The focus at Kornitzer Capital Management has for some time been on “companies who sell to the world,” Kent Gasaway said. To compensate for a sluggish American market, the bias at Kornitzer for some time has been to buy companies that have high percentages of their overall revenues outside the United States and are continuing to pick up market share abroad.
The Housing Market
Kristin Tyson talked about the shock factor that hit much of America upon the realization that home prices could actually drop. “I think a lot of people still don’t want to believe it,” said Tyson. “How could they have built a $3 million home three years ago and now it’s worth $1.5 million?” This shift in expectations has made it especially important for financial advisers to help their clients understand the way the market works.
Jim Williams referred back to the fear-greed pendulum. “People think what once was a safe investment is no longer safe,” said Williams, “and that has fueled the fear that is in every conversation with clients.”
“We think you’ll see continued pressure on the housing market,” said K.C. Matthews. Now, he explained, there is a 12-month supply of homes on the market. UMB research shows that every time the supply is greater than seven months, housing prices go down. Real estate remains a viable asset class, but one’s primary residence, he believes, should no longer be considered one.
Lana Maudlin observed that for those investors who looked at their home as a hedge against inflation or as the safest of their assets, “have been thrown into a tailspin.”
Your house really isn’t really an asset,” confirmed Adam Bold. “It’s not really part of your financial portfolio.”