More Smart Moves for Investors

I spent a lot of time on the phone this week talking to advisers and strategists about smart moves for investors, given the recent volatility. Some of my reporting ended up in the magazine, but other stuff landed on the cutting room floor.

I quote a few sources in my piece, but there are plenty of people thinking about blue chips right now. “This recent bout of volatility should have investors thinking more about high quality versus high-yield, and large-cap versus small cap,” says Leo Grohowski, chief investment officer at U.S. Trust, Bank of America Private Wealth Management which has nearly $265 billion in assets under management.

As I mention in my story, Thomas P. Melcher, chief investment officer of Hawthorn, a unit of PNC Bank with $16 billion in assets, is also shifting more money into large-company growth stocks. He likes consumer durables, such as Coke, which has strong operations outside of the U.S. and benefits from the weak dollar. “A lot of people out there want new, cutting edge, gimme-something-exciting stocks,” Melcher says. “Maybe large-company stocks haven’t done as well year to date is because it is hard get excited when your adviser says you should buy Coke.” He’s also taking cash and investing it General Electric, which continues to boost dividends. And Tim Hartzell, a portfolio manager at Houston’s Kanaly Trust, which manages almost $2 billion in assets, also likes Coke, as well as Caterpillar and 3M.

Although large-company stocks are more attention in the U.S., advisers still think overseas markets are a good bet. “We are increasing our international exposure by about 5% to shield against a possible slowdown in the US and continued growth abroad,” says Morris Armstrong, a certified financial planner in Danbury, CT. While the bulk of international exposure should be in developed markets though funds like Dodge & Cox International, advisers also recommend a smattering of emerging markets exposure. For investors interested who want to hitch on to the boom in China and India, Matt King, portfolio manager at Bell Investment Advisors, an investment advisory firm in Oakland, Calif. with $500 million in assets, recommends T. Rowe Price New Asia or Matthews Asia Pacific or Matthews Asia Pacific Equity Income. For broader exposure, Hawthorn’s Melcher likes Vanguard Emerging Markets ETF as well as iShares MSCI Emerging Markets ETF. “Both offer a quick way to get exposure at a reasonable cost,” Melcher says.

The theme is the same in the fixed-income markets where advisers are switching to higher quality bonds. “This is not an exciting time for high quality bonds,” says US Trust’s Grohowski.“But investors should view it as an anchor.”

Armstrong, the certified financial planner, is shifting client money out of Pimco Total Return fund, which is takes on more interest-rate risk than its peers, and buying Julius Baer Total Return bond, a lower volatility option. Although the loan market is in turmoil, Armstrong is also sticking with bank loan funds, including Oppenheimer Senior Floating Rate fund and Hartford Floating Rate Loan, which invest in higher-quality loans.

Brant Keller, a certified financial planner in Naples, Fla., with $200 million in assets, isn’t letting his clients take on much interest-rate risk. He’s loading up on one-year U.S. Treasuries and one- and three-year global bonds. Because it is hard to build a portfolio of international bonds without racking up fees, an easy way to play the international fixed-income markets is the DFA Two-Year Global Fixed Income fund.

Advisers are also eying Treasury Inflation-Protected Securities (TIPS). “The strong rally in Treasuries caused the implied inflation rate to drop to 2.30% on ten-year securities,” Robert Nelson, a portfolio manager at 1st Source Corporation Investment Advisers, told me. “We expect this will get back to above 2.40% in the short term and even higher (2.60%) in the next three to six months.” Nelson likes high-quality, high-coupon preferred stocks, which have fixed-income characteristics. He says he recently snapped up some Citigroup preferreds at very attractive yields relative to corporate bonds bonds and money market alternatives. “If they’re called in one month, the annualized yield would be over 20%,” Nelson explains. “If not investors will receive yields of approximately 7% until they are called.”

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