What We Know
Active management makes sense in troubled times.
You’ve been counting on the value of your home to appreciate and, in the interim, have taken advantage of low adjustable mortgages rates to keep payments on that home reasonable.
Your investment dollars are invested prudently, or so you thought, in mutual funds focused on growth – primarily through US stocks – and on income – through corporate bonds.
Managing your money seemed fairly simple when the economy was chugging along steadily.
But now, home prices are weakening and concerns about inflation are intensifying as food, energy and other prices zig-zag their way higher. Wall Street’s bulls are starting to mumble as the domestic stock market stumbles. And if interest rates should begin to climb again, those bonds you own are almost certain to fall in price.
What do you do now?
To start with, you might want to take a step back from your home, your mortgage, your stocks, bonds and other assets, and take a look at how “the smart money” invests.
The fact of the matter is that the smart money – that is, institutional investors – used to invest the same way most individual investors do today: By buying a mix of “safe” blue-chip stocks, growth-oriented small stocks – maybe the stock of companies in selected foreign markets or a favorite industry sector or two. The rest of their portfolios might have been invested in investment-grade corporate bonds in an attempt to combine safety with moderate and consistent income – with some high-yielding (otherwise known as “junk”) bonds thrown in to increase the interest earned.
In 1980, for example, that’s how Harvard managed its multibillion-dollar portfolio – with about 65% in domestic stocks and the balance in bonds.
But flip those calendar pages forward and take another look. By 1998, Harvard had reduced its investment in domestic equity to about 30%, and pared its bond holdings to less than 20%. And in 2007, the $30 billion Harvard Endowment holds roughly 15% in US stocks and 10% in bonds.
So what did they do with the rest of the money?
They invested a small part of it in stocks – but in selected foreign markets. Much of the rest went to even less conventional choices, ranging from private equity to real assets – such as timberland or energy infrastructure to “special situations.”
Very generally, special situations usually involve turning around an underperforming or distressed business. Investment in special situations can be passive – buying the bonds of such a company for pennies on the dollar, and hoping that management will be able to make the company work – or active – taking control of that company. For most individuals, the latter option means investing with a manager who takes an active role in “turning around” the companies in his portfolio.
With all that in mind, here are some suggestions for investing for today … and tomorrow.
In an environment where credit worries run rampant and the domestic stock market has become increasingly erratic, you may want to avoid high-yield bonds and funds and consider reducing your current US stock holdings. Instead, and with the help of a trusted professional, consider foreign stocks in developed countries together with long-term, high-quality debt.
Over the longer term, assess options other than your “conventional” stock and bond holdings, including investments in both public and private equity in foreign markets. You might also want to consider investing in “real assets” such as energy infrastructure or foreign real estate – whether through a public fund or private placement.
_______
This preceding is based on information, assumptions and market conditions believed by Contango Capital Advisors to be accurate as of the time this was prepared. It is offered for informational purposes only, and should not be construed as a solicitation to buy or sell securities. Please consult an investment professional concerning your own needs and circumstances and to obtain any specific advice with respect to the topics discussed above.
If you would like further information about Contango Capital Advisors, the wealth-management arm of Zions Bancorporation, please visit www.contangoadvisors.com or e-mail Contango at contact@contangoadvisors.com.
_______
This commentary based on information, assumptions and market conditions believed by Contango Capital Advisors to be accurate as of the time this was prepared. It is offered for informational purposes only, and should not be construed as investment or financial advice. Please consult an investment professional concerning your own needs and circumstances and to obtain any specific advice with respect to the topics discussed above.
We invest in assets that tend not to move in tandem with US stock and bond markets.
