Financial advisers and wealthy investors largely are on the same page these days.
They have more money in less risky investments—primarily Treasury and other bonds—as they await more reassuring signs that Wall Street is solidly back.
This conservative approach continues to define investment strategies here after the stock market crash of late 2008 and early 2009.
The cautious tack prevails despite a spate of positive news on Wall Street, including the second best September since 1939 and the Dow Jones Industrial Average eclipsing 11,000 this month for the first time since May.
Yet the psychological boosts haven’t swayed the minds of financial advisers, corporate money managers and individual investors, who overwhelmingly missed recent rallies by opting for safe, low-yielding plays.
“The typical retail investor didn’t participate in the market turn,” said Matt Healy, a senior investment manager and senior vice president in Newport Beach with the wealth management group of Wells Fargo Advisors, part of San Francisco-based Wells Fargo & Co. “The trend is money flowing into bond funds.”
Many of Healy’s clients are invested in tax-free California municipal bonds, he said.
The bond bias is a familiar refrain among the county’s largest financial advisers.
The bond market has been on quite a run, pulling more money in than out on a quarterly basis for nearly three years.
Eventually, interest rates will go up and the value of bonds will go down, curbing investor appetite for them.
Until that happens, skittish investors may continue to avoid a major push in equities.
But investors here aren’t ignoring stocks altogether.
Healy, who manages more than $400 million for a group of wealthy families, is eyeing large corporate stocks that pay high dividends as well as emerging market stocks.
Investments for dividends—a conservative stock play—are gaining popularity, said Michael Phelps, a financial adviser with Merrill Lynch & Co. in Newport Beach.
Demand for dividend stocks could increase as investors start to seek higher returns than their bond-heavy portfolios now are providing, he said.
Baby boomers looking for steady income also could drive a move into dividend stocks, according to Phelps.
As investors seek higher returns, “We recommend they avoid dividend yield traps and focus on companies that have strong free cash flow,” Phelps said.
Cash is likely to keep flowing into bonds, with emerging market debt a favored move for investors searching for bigger profits, according to Phelps.
While most investors largely have avoided the stock market in the past two years, recent gains have produced some positive vibes in the industry.
“This is the most favorable I’ve been on the market for the year,” said Scott Parent, senior equity portfolio manager for Irvine-based investment brokerage Finance 500 Inc.
But Parent said he’s not ready to bring out the bubbly.
“We’ve seen the market break out and fail miserably several times,” he said. “I’m not convinced this is for real.”
Parent would like to see Standard & Poor’s 500 index hold above 1,150 for some time before pushing clients into equities.
The index was at about 1,160 last week.
Finance 500 primarily manages money for wealthy clients in Southern California through a small-cap growth portfolio, fixed-income plans, exchange-traded funds and mutual funds.
Like many competitors, Finance 500 advisers have been pulling some cash from Treasuries and certificates of deposit and reallocating that money into corporate, municipal and high-yield bonds.
“None of that money has found its way into equity markets,” said Phillip Vigil, a senior portfolio manager at Finance 500. “We need some level of stability on the equity side to pull that money out of cash.”
Switzerland’s UBS Financial Services Inc. has a neutral position on investing in equities.
“People will move more into riskier assets if they feel the economy has bottomed out and things will get better,” said Ed Levin, an adviser in UBS’ Newport Beach office.
Fear Prevails
While Levin said he expects the economy to gradually improve, fear and uncertainty are turning his clients away from the stock market.
“Our clients are expecting to stay in fixed income for a year or two,” said Levin, who manages money for people with at least $5 million in net worth and institutional investors such as banks, hedge funds, money managers and endowments. “They are not looking to catch the low in the market or even the middle. They’re looking for more certainty. They’re investing, not speculating.”
Speculation has boosted gold prices to record levels in recent weeks. Some advisers see gold as a viable hedge against inflation and a weak dollar.
Others point to emerging markets to make the case for gold in a portfolio. Detractors steer away from it altogether.
Gold is attracting new and hot money, much like oil did a few years ago when prices spiked to $148 a barrel.
“The minute that stops moving, everyone can’t get out of the door fast enough,” Finance 500’s Vigil said.
The challenge is determining fundamental demand versus speculation.
“People flock to (gold) simply out of perception and fear, rather than if it has some intrinsic and underlying value,” said Lance Hicks, chief executive of Finance 500.
Balanced Approach
Merrill Lynch’s Phelps emphasizes a measured approach.
“Historically, having some allocation to commodities tends to smooth out the volatility in a portfolio,” Phelps said. “Gold is one of many commodities we urge clients to consider owning to achieve proper diversification.”
Wells Fargo’s Healy said he sees gold as a reserve currency to hedge against inflation, especially given questions about the euro’s survival and the dollar’s decline against other currencies.
