INVESTMENT OUTLOOK : 1988 OUTLOOK : MARKET PROS : Money Managers Make Their Picks for 1988
What are the investment outlooks of institutional money managers for 1988? Michele Lingre, a Los Angeles free-lance writer, interviewed various California money managers to find out. Excerpts of their comments follow:
Robert G. Kirby, chairman of Capital Guardian Trust, was named last month by President Reagan to the commission investigating October’s stock market crash. His firm manages more than $15 billion, and its clients include Coca-Cola, Dow Chemical, Ford Motor Co. and Stanford University.
“Our investment philosophy is pretty old-fashioned. Most of our clients hire us to manage common stock portfolios. So there isn’t much of an investment mix. We’re not trying to hit home runs, we are just trying to hit singles. You can call me Captain Caution. Still, you know, somebody invested 90% in stocks is not that cautious. But you don’t have to be too nervous in a market that’s slightly overpriced. If you take Fortune’s top 50, I’d faint if we don’t own 30% of those, stocks like General Electric, Exxon. We’re invested in high-quality, traditional, big companies. Our largest holdings are in stocks like IBM, Merck, Ford Motor, Chevron. You know, if you are running $15 billion in assets and you are not buying any IBM, you’ve got a hell of a problem.
I think since the crash, everyone has made a modest shift away from cyclical companies toward interest-rate-sensitive stocks. After the crash, we spent some cash and put it in counter-cyclical companies like J. P. Morgan & Co., American General and utilities like the Bell companies. There are no major changes planned now. You know, if you’re running $15 billion in assets you can’t just say ‘Whoopee! Let’s change our portfolio.’
“For the man on the street, it’s still sort of wise to hang around, keep a little buying power and find out whether the trauma is really over. The market seems reasonably priced to me, although less attractive than bonds. As to where the market is going, I don’t have the foggiest idea, and since I don’t get paid much to guess, I won’t.
“It’s a good time to have a balanced portfolio with stocks, bonds and real estate. I’ve never been a precious metals guy--the value of gold is in the eye of the beholder. Its only applications are in jewelry and dentistry, and I don’t want to invest in something that depends on somebody else’s emotions or the politics of South Africa. When you go through a period like the past one, you get all your humility back and you realize that your ability to predict the future is about the same as your granddaughter’s. I’m just going to stay where I am.”
James P. Owen, executive vice president of NWQ Investment Management. The company manages overall assets of more than $800 million for such clients as Directors Guild of America, Unisys and National Bulk Carrier.
“The October crash was a worldwide collapse in stock prices that in all likelihood will bring about a slowdown in the economy. But we don’t we know how severe the slowdown will be. Even Alan Greenspan doesn’t know that.
“If we suspect that we may be entering a bear market, then what recession beneficiaries can we identify? The quickest to come to mind would be bonds. Government bonds have maximum liquidity and they are non-callable, unlike a corporate bond and there’s minimal credit risk. In 1988, we wouldn’t be surprised to see government bonds appreciate, let’s say, 15%-20% in total return.
“On the other hand, we would avoid housing stocks--about the only people who find real estate attractive today are those who are trying to unload most of it. In our opinion there continues to be overbuilding in most of the money centers (and that will hurt) financial services. I’m not predicting that Willie Nelson is going to have a ‘Traders Aid’ concert in Central Park, but a number of the brokerage firms are likely to be in trouble.
“Going into October, NWQ was 50% in stocks, 20% in two- to four-year government bonds, and 30% in cash equivalents like Treasury bills. Since the crash, we became even more defensive. Now our asset allocation mix is 35% stocks about 35% government bonds, and that would be split between two- to four-year maturities and 10-year maturities. The remainder, about 30%, is in cash equivalents.
“Our strategy is that even in times of recession, people still buy food, toilet paper, toothpaste. People may even drink more beer than they did before, and they’ll still take aspirin. So we key on consumer staples. Of the 35% invested in stocks, probably one-third of that would be in the consumer staples, utilities and telephone stocks; another one-third would be in pharmaceuticals, property and casualty insurance, and the third group would include some of the beneficiaries of the declining dollar--chemical companies, paper, guys who are exporting.”
Robert M. Raney, senior vice president and chief investment officer of Summit Management, which manages $500 million. Its clients include Magnetek, Occidental College and Pacific Homes.
“It is now the manufacturing sector of the economy that is showing strength, benefiting from the lower value of the dollar. I had an analyst in here today and he said we actually might be exporting some steel products; we haven’t done that for many, many years. The consumer sectors may not be quite as strong as they have been--the consumer has a heavy debt load and consumer spending is going to fall off a lot.
“The decline in October re-emphasized the benefits of investment diversification. At the moment, we’re 20% in cash, good quality money market instruments due within one year; 40% in intermediate-term bonds.
“There is a lot of cash and pessimism around, the market in general is oversold, and it has the potential to bounce up a bit, at least on the intermediate-term basis. We’ve got some cash ammunition and our hope is to put that money back into the stock market. It will either go into convertible securities or into equities. We’re spending our time working on a list of companies we think have good prospects and that are clean financially.
“There are a number of stocks in the manufacturing and technology areas we think are attractive, like Zero Corp. or Caterpillar Tractors. Other areas we like are real estate investment trusts such as REIT of California and Pennsylvania REIT and energy stocks like Chevron. The areas that we would reduce somewhat are the consumer-related issues and, to some extent, some financial stocks.”
Richard P. Carney, president of Cramblit & Carney, which manages more than $600 million. Clients include Claremont University, Screen Actors Guild and 20th Century-Fox.
“While most economists are not predicting a recession, we think it’s a real possibility. We can see that now that it’s stabilized, the market could edge somewhat higher in the early months of 1988, but it’s our belief that there has been a rather permanent change in psychology at least for 1988.
“Our expertise is in stocks and bonds and money market instruments. At the end of September, in our typical balanced account we were only about 50% in common stocks, which was the most conservative position we’ve had in the 13 years we’ve been in business. Now, it’s slightly less than that. In that 50%, our focus is on strong balance sheet companies that are generating high return on shareholders’ equity with relatively low debt: American Home Products, Amstrong World, Melville, Pitney Bowes. We feel these companies are best positioned to ride out a recessionary environment in 1988, because the products they sell are consumer-oriented staple-type merchandise. American Home Products has no debt, lots of cash and sells prescription and non-prescription drugs. That’s not likely to be cut back. Pitney Bowes is basically into postage meters--that doesn’t decline.
“At this point, it is our intention to stay with such strong balance sheet companies. The heavy industries--the metals, the chemicals--tend to be highly leveraged and in a recession you tend not only to have a decline in business, but the high fixed costs affect the earnings per share significantly. Of the rest of the assets we manage, generally 30% is in relatively short-term government bonds, four- to five-year maturities, and 20% is in money market instruments. The decline has taken us from a period of extreme overvaluation to one of slight overvaluation, but we’re not making any major reinvestments.”
Sidney Hansen, executive vice president and chief investment officer of Trident Investment Management. Managing $800 million, its clients include the City of Chicago.
“We describe our investment strategy as one of investing in high-quality securities: IBM, Kimberly Clark. In the event of a recession in 1988, we would stick with them because they have already suffered some pretty serious reaction. Of course, they could go lower, there is never any guarantees in this business, but we are long-term investors and we do not feel the environment has changed that much to make stocks an unacceptable investment today. I would say we have 40% of our assets in stocks, 40% in bonds and 20% in real estate. For bonds, we keep our average maturities between four and seven years. We feel confident that interest rates will not be rising sharply in 1988.
We are now emphasizing real estate more than the two other items. Right now, to get true diversification in a portfolio, one should seriously look at real estate, the reason being that real estate has been rather flat for the last five years, whereas both the stock and the bond markets have had pretty sensational increases. Historically, real estate will run counter to stocks and bonds. In the late ‘70s, stocks and bonds did not do very well, because there was an inflationary environment. Real estate has a longer-term investing horizon than stocks and bonds. When you are investing in a large real estate project, you are thinking in a time frame of seven to 10 years.
“We do quantitative analysis to bring to the surface what we believe are companies that are undervalued. Right now, I would say that a number of them are in the financial sector. Because of Black Monday, these stocks have been oversold, therefore from the long-term point of view, they look very reasonable--barring any sort of financial collapse, of course.
