Bob Klein considers himself a student of economics who started studying financial markets before ever setting foot on a college campus.
That lifelong passion for investing came in handy during the past two years, he said.
The Newport Beach-based J.P. Morgan Securities Inc. adviser used a mix of strategies during Wall Street’s meltdown of late 2008 and early 2009 and during its rebound most of last year.
Part of his portfolio was invested in traditional “long” plays where he expected stocks and bonds to rise in value over time, according to Klein.
He said he also shorted several investments, betting they’d fall in value. At one point, Klein said a big portion of his investments was in shorting bonds.
The result was a return of 30% in 2008 for clients using Klein’s combination long-short investing, according to internally audited returns.
Those choosing to stick with long-only strategies didn’t do so poorly, either. They averaged about a 2% loss that year, he said, versus a 38% drop for Standard & Poor’s 500 index.
“I got cautious and started going long in gold, cash and investment-grade bonds in late 2007,” Klein said. “My clients wound up with a pretty good year in 2008.”
Along with 10 other local wealth managers, Klein was picked by Barron’s magazine recently as among the top in his field.
The Barron’s study, the basis of the Business Journal’s list of top wealth managers, used a combination of real returns, complexity and scope of advice given along with a wide range of other factors.
With Wall Street now in a yearlong rebound, wealth managers have adjusted their strategies.
Mark Binder, a Newport Beach-based wealth manager at Bank of America Merrill Lynch, said he believes recent market gyrations are causing investors to question more than just their stock and bond portfolios.
“Now, we’re managing to a new normal,” he said, borrowing a phrase from Newport Beach’s Pacific Investment Management Co.
That means slower growth in the U.S. and a greater share of world output coming from global markets, he said.
Binder believes that owning global stocks and bonds is going to become “an increasing piece of our clients’ assets over time.”
Stock Shifts
In late 2007, Binder’s typical portfolio was about 55% in stocks. At the start of 2008, Binder and his team dropped that exposure to 45%, he said. By that summer, a generic client portfolio held some 35% in stocks.
“We didn’t have a crystal ball that the market was going to fall by 30% to 40% in 2008,” Binder said. “But we did make these moves because we saw volatility in the markets spike, and several of the statistical measures our asset allocation partner on the team uses went up quite a bit.”
At the start of 2009, investment-grade corporate bonds were trading at attractive levels, he said.
“The first thing we did for clients was take advantage of getting equity-like returns as corporate bonds took off,” Binder said. “We didn’t increase our equity allocation. But we dramatically increased our exposure to corporate bonds and bought some high-yield bonds as well.”
As markets rallied in the spring of 2009, Binder focused on different types of investments. Those included investing in mutual funds that use hedge fund-like strategies. He also added some commodities through exchange-traded funds.
“We wanted a hedge against inflation, and commodities represented one part of that strategy,” Binder said. “We invested in a gold ETF and a broad-based commodities ETF.”
Last June, he and his team began increasing stock investments by about 5% to 40% in all, according to Binder. About that time, he said he also began upping holdings in utility stocks and convertible bonds.
For Laila Marshall-Pence of Newport Beach’s Pence Wealth Management, preserving money and building it to generate income is her aim and that of husband Dryden Pence, the firm’s chief investment strategist.
“We’re active managers,” she said. “We don’t do a lot of buy and hold. We take profits when profits are available and cut our losses in a market downturn so we don’t ever have to cut into a client’s cash flow.”
During the recession, that strategy of protecting income limited the amount of fear ex-pressed by her clients, according to Marshall-Pence, whose firm is one of only two independents to make the Business Journal’s list of top wealth managers here.
“We love when an investment appreciates, but it’s very important that we get paid for owning an investment over time no matter how the market is reacting at any given time,” she said. “We accomplish that by owning stocks and bonds that pay dividends.”
Right now, she said she likes real estate investment trusts.
“There are some great opportunities today, especially in private REITs,” Marshall-Pence said. “With the lack of financing, being able to buy with cash in a down market is a good time to make strategic moves in individual REITs. It’s a small amount of the overall portfolio, but we understand real estate and yields are very good right now.”
In the past year, Pence Wealth Manage-ment also has been buying individual municipal and corporate bonds, according to Dryden Pence.
“We were able to buy, during the downturn, individual bonds at significant discounts,” he said. “Now, our portfolios are benefiting from both capital appreciation as well as significant yields.”
In stocks, Dryden Pence looks for dominant players with a theme.
“We look at a macro view and indentify best-of-class companies that pay dividends in that sector,” he said.
In terms of sectors, Dryden Pence favors railroads and transportation.
“The worldwide demand for commodities (is high) and big, bulky items are typically moved by rail,” he said. “It doesn’t matter whether it is coal or wheat, it’s probably going to move by train. So we’re not focused on the individual item as much as the mode of transportation.”
Dryden Pence said he also likes large telecommunications companies.
“The growth of information isn’t going to stop,” he said. “The dominant telecom providers are in a good position to grow over time. We don’t worry about finding the hot stock—we’re looking at companies generating tremendous cash flow and paying us good yields to wait until the market rewards management for a job well-done.”
J.P. Morgan’s Klein said he was fully invested in stocks by early last year. At the same time, he shorted bonds in accounts using his long-short strategy.
“The government’s willingness to risk depreciating the value of its currency to get out of the crisis put owners of Treasury bonds at risk,” Klein said. “You can get paid back your money with interest, but the question becomes how much will that money be worth by that time.”
He’s said he’s still avoiding bonds. Besides stocks, Klein is investing in natural resources such as oil and gold.
In some accounts, such exposure to natural resources amount to nearly half of all assets.
“Given the Fed’s commitment to keep interest rates low and printing enough money to make that possible, I don’t think that’s a risky approach,” he said. “My whole way of thinking is to focus on my best ideas and really monitor those investments. I don’t take a Noah’s Ark approach to investing and try to cover all my bases all the time.”
Klein is optimistic at least for the near term.
“Things should get better for awhile,” he said. “When the Fed finds itself where it can’t keep stimulating the economy, then the situation can change. But as long as inflation remains low, I expect to remain out of bonds.”
