The spotty economic recovery seems to be spoiling the appetite of financial advisers.
“We’re still risk-averse,” said Jay Ferrara, vice president and investment officer with Farmers & Merchants Trust Co.’s office in Laguna Hills. “We are underweight in terms of our equity allocations. We’re plain vanilla—and that’s a trend that may reassert itself moving forward.”
Global markets aren’t helping, with recent swings in investor sentiments reflected in Treasury prices that have been jumping around in reaction to headlines about the European debt crisis.
Investors have sold off U.S. government debt with expectations of a viable solution for the euro-zone crisis. Any news throwing doubt on Europe sends them back into Treasurys, seeking safety over higher returns.
“What you’ve seen is a bunch of hype and hope regarding Europe getting their issues in order,” Ferrara said. “The market popped, but nothing came out of Europe in terms of solid plans. We’re not buying into it.”
The recent gyrations have been magnified by the sluggish pace of economic growth in the U.S., according to Mike Ryan, chief investment strategist of the wealth management group of New York-based UBS Financial Services Inc.
“The market is really reacting to soft patches,” he said. “Growth is so fragile, much more subdued. This is a reflection of the stage we’re in—the hangover from the financial crisis.”
According to UBS’ October survey of 2,038 U.S. investors with more than $250,000 in investable assets, most worries continue to center on big-picture concerns about the national economy.
Worries
More than 60% of respondents indicated they were very worried about the size of the U.S. debt, and 53% cited market volatility as a chief concern.
Both figures were about the same in a similar survey three months earlier.
Fears about global conditions are growing, according to the survey.
The percentage of respondents showing concerns about the European debt crisis rose 17 percentage points. Nearly half of the respondents cited Europe as a major worry.
City National Securities, a unit of Los Angeles-based City National Corp., has reduced risk in the last quarter, but not drastically, according to Jack Biedebach, vice president and financial adviser at the Irvine office. He called the bank’s current investment model a “defensive portfolio.”
City National, which manages $56 billion in client assets, has 18% of its portfolio in the stock market. Its cash allocation has “swelled to 29% of the portfolio because of market volatility,” according to Biedebach.
UBS’ Ryan said the uncertain market leads investors to “gravitate toward the flagship issuers, gravitate toward the benchmark in the industry sector.”
“Mispricings”
In other instances, market volatility “creates mispricings, and they create extraordinary opportunities,” he said.
Los Angeles-based investment bank B. Riley & Co., which has an office in Newport Beach, is seizing the opportunity.
“We try and find things that are out of favor,” Chairman Bryant Riley said. “As long as you’re investing in companies with good businesses and solid cash flow, the volatility is a benefit. We absolutely try and take advantage of that.”
B. Riley recently made 12 hires to its offices companywide, an increase of 18%. The firm cut its OC employment by three positions, and now has eight registered representatives here.
Mixed Bag
The mixed bag of market data and sentiments has prompted investors to ask the question of whether this uncertainty in the market could be the new norm.
“What about tomorrow? Yesterday?” said Mary Helmich, senior vice president and manager of City National Bank’s preferred banking program. “It’s so difficult for clients to take all this in—one day is different from another.”
Hopes for Q4
Hope for a better fourth quarter remains for some advisers.
“Historically the third quarter has been the weak quarter over the years,” said City National’s Biedebach. “The fourth quarter is stronger. As we see the earnings season getting strong, the economy picking up a little bit more, and the scare diminishing, we’ll see more investing into equities.”
