Sunday, January 29, 2012

A Sanguine Consensus From Investment Experts

The Minnesota Chapter of the Association for Corporate Growth co-hosted its annual forecasting dinner with the CFA Society of Minnesota, and it was a full boat with about 450 people in the audience. 

The investment recommendations too were things I have heard before from Merrill Lynch's CIO list to many others.  The Fed's recent pronouncements may have taken the edge off investors skepticism.  The recent uptick in 4th quarter GDP, which brings output about equal to pre-recession levels seems also to be making investors less glum. 

Fourth quarter earnings season has been mixed, so far.  GE's announcement about its core industrial businesses was disquieting. Other industrial companies have fared better, especially on the top line.  I wonder if some of this wasn't timing of orders. 

Dean Junkins, the Chief Investment Officer of Wells Fargo Private Bank noted some interesting facts about the strength of corporate balance sheets.  A consensus equity recommendation is that investors hold a large stake in dividend paying stocks, either with a high dividend growth rate or with a high yield and a sustained record of increases.  Even with the strength of dividend increases in 2011, Junkins noted that the overall payout ratio for SP500 companies is at its  lowest levels in 140 years!

On the fixed income side, another consensus recommendation is to include high quality corporate debt, and indeed there are several funds which have been in this strategy for two years already, enjoying substantial gains.  Higher quality High Yield (an oxymoron?) also got the nod from participants as a quasi-equity play and as a source of additional income for a portfolio.

According to one panelist, in 2007 there were $20 trillion in high quality credits worldwide which would be considered qualified investments for large institutional accounts.  Today, the panelist said, the number is now about $12 trillion in high quality credits.

It's surprising how the outlooks all seem to converging around the same central tendencies.  That's usually a cause for concern.  The argument for high yield debt was made from the point of view of spreads and of default rates.  Europe was something to be monitored, but no panelist felt that a Euro nation bankruptcy was in the cards. Investors are piling out of commodities, which suggests a benign inflation outlook.  Pretty sanguine again.

Volatility and correlation among asset classes will likely remain high.  This, coupled with an almost zero cost of funds, suggests that high turnover, risk-based strategies should be where the really money is made.  Some commentators mention that corporate cash and the low cost of debt will help fuel mergers and acquisitions in the first six to nine months of the year. 

The old saw goes, "the market climbs a wall of worry."  If that's true, I didn't hear any worries from this panel.

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