Financial advisers attend Morningstar's Investment Conference each year to get ideas on how to better serve their clients. This year, I wanted to learn what the great minds in the financial industry think about current market conditions.
Bill Gross, founder, managing director and CIO of PIMCO, addresses the audience at Morningstar's Investment Conference.
We've been immersed in extremely unusual circumstances over the past several years. The Federal Reserve brought interest rates down to rock-bottom levels when the financial crisis unraveled in 2008, and rates have been stuck there ever since, making it hard for people in retirement to find income and forcing investors to find better returns in the stock market.
Now that the stock market has sharply rebounded, what's next?
Some money managers at last week's conference seemed worried. Here are some highlights.
Emerging markets awash in liquidity
Michael Hasenstab, chief investment officer of global bonds for Franklin Templeton Fixed Income Group, focuses on emerging markets, which he says vacillate between "massive pessimism and excessive optimism." Central bank policy, particularly the easy-money policy by the Bank of Japan, will impact emerging markets, he said. He went on to discuss the countries that performed well (Hungary, Poland, Korea and Mexico) and those that did not (Brazil, India, Malaysia and Indonesia). "We can't be universal in our comments about emerging markets," Hasenstab said. And although he said this is "an exciting time," he recently shifted his portfolio to short duration assets, a move to protect it from risk.
At one session featuring the views of Morningstar Investment Management's best and brightest, Daniel Needham, CFA, global chief investment officer, said monetary policy has created an unusual investment environment. Investors are taking much more risk to generate returns, despite their level of discomfort with valuations. It pays to hold a little bit of extra cash, he said.
More ominous views
At the session on "Unconstrained Bond Funds," two out of three fund managers who spoke said they hold a 60 percent position in cash or short-term bonds. That speaks volumes about their outlook.
Mark Egan, CFA, managing director at Reams Asset Management, a division of Scout Investments, pursues absolute returns irrespective of a bond index. He characterizes his current style as "extremely unaggressive."
"Over the last 12 to 18 months, spreads fell to a level that makes no sense," Egan said. It remains a fragile system, and a change in policy will be "sharp, severe and sudden." He is working hard to avoid bad bonds, as well as negative returns over the next four or five years.
"You know what? I pretty much like nothing," agreed Bill Eigen, CFA, head of absolute return and opportunistic fixed-income strategies at J.P. Morgan Asset Management. "Spreads are at or near all-time tightest levels," he said. "When rates get to zero, your risk of losing money is 100 percent. ... My job is to protect capital at all costs."
PIMCO's Bill Gross takes starring role
Trotting out on stage dressed like a Hollywood movie star, keynote speaker Bill Gross of PIMCO Total Return fund fame made no apologies for his fund's less than stellar performance recently, though he noted the $50 billion exodus over the past eight months by investors. Instead, he outlined how his fund consistently outperformed over the years.
Rather than prognosticate, Gross equivocated about the future of the markets. He said that the focus now is on central banks and their policies, and what PIMCO calls "the new neutral." A neutral fed funds rate would be the short-term interest rate that is neither stimulating nor restraining to the economy. The real policy rate has been negative, he said, ranging between -1.25 percent and -1.5 percent. That's the nominal fed funds rate minus inflation. That negative rate stimulates investment markets, he said, and the Fed will have to raise it to "prevent bubble popping."
But in 2007, a real rate of 1 percent broke financial markets, he pointed out. "We're still a highly levered economy," he said, meaning our national debt is gargantuan, and our Social Security, Medicare and Medicaid programs are strapped for funds. "A 2 percent real rate is far too high in a levered economy."
Future market moves will depend on future Fed moves. "If the real rate is zero, then asset prices are less bubbly," he observed. "At zero things make sense. It just depends on if the Fed knows what it's doing. New neutral is critical. Is it 2 percent? Zero? What should it be?"
A portfolio should be designed by expectations of the Fed, Gross said. The new neutral has to be lower than 2 percent. PIMCO thinks 0 percent is right. If the Fed aims higher and is wrong, markets will be volatile.
That doesn't mean the world will end. But what does it mean to those who have worked hard all their lives at retirement planning, and who have amassed a sizeable sum?
It means that it might be time to move some money off the table and put it into something safe.
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Barbara Whelehan is a co-author of "Future Millionaires' Guidebook," an e-book by Bankrate editors and reporters. It is available at Amazon, Barnes & Noble, iBookstore and other e-book retailers.