Large-cap doldrums drive alternative investment quest

Many advisers are shifting assets away from large-caps in favor of small-caps, real estate and commodities.

John Belluardo, president of Stewardship Financial Services Inc. of Tarrytown, N.Y., for example, has reduced large-cap exposure in his clients' portfolios to 20% from 30% in the last five years.

"I don't think large-cap is really where the action is for long-term investors," said Mr. Belluardo, adding that he prefers an equal allocation to large-cap, mid-cap, small-cap, real estate and international equities.

Large-caps shed $22 billion year-to-date as of June 30, according to Lipper Inc., the Denver-based research firm.

In 2004, large-caps had $11.4 billion in net outflows, followed by redemptions of $54.7 billion in 2005, $40.7 billion in 2006 and $66 billion last year.

Peng Chen: People are more comfortable investing globally."

"People are more comfortable investing globally and not just in a U.S.-centric way," he said.

"Also, in the past 15 years, the market has opened up more options, such as in real estate and commodities," Mr. Peng said. "That also takes more away from large-cap."

More investors may be heeding the call of diversification, and new investment vehicles have made that easier, advisers say.

The emergence of exchange traded funds has played a significant role in asset allocation shifts, said David Hunter, president and owner of Horizons Wealth Management Inc. of Asheville, N.C., which manages $13 million in assets.

"It's only been in the past two to three years that the commodity ETF has come on the scene," he said.

"[It] has definitely given us more room to diversify and spread out among the groups. We don't want all of our eggs in one basket."

Mr. Hunter's average portfolio will have one-third of its assets spread among commodities, REITs and international equities, he said. Another 30% is in domestic equities, with equal weights in large-, mid- and small-caps. The remainder is in fixed income.

Globalization has also played a part in the move toward diversification. "This is not your father's portfolio," said Sam Sudame, chief investment officer of Schultz Financial Group Inc. of Reno, Nev., which has $180 million in assets under advisement. "Opportunities in the rest of the world are growing, and now we have the ability to access products such as bond funds linked to developing markets and foreign exchanges, or emerging-market funds."

Aging clients, although comfortable with large-caps, are leaning toward diversification, said Ted Toal, senior partner with Triton Wealth Management of Annapolis, Md., which manages $90 million in assets.

"Baby boomers ... want to produce income in retirement," Mr. Toal said. "Large stocks are not as risky as small over time. But to get the higher rate of return, they'll have to use more small."

One of his typical portfolios may have 25% to 30% of assets in domestic large-caps, he said. "In the first half of this year, the markets were down and commodities were up. It made a great case for diversification."

Assets are also growing in multi-cap, a "go-anywhere" asset class that includes target-date and target-risk funds, said Tom Roseen, a senior research analyst at Lipper.

"I think the investor is saying let the manager do the choosing," he said. "People got burned so badly in the 2000-2002 [market] decline."

Multi-cap assets grew to $1.3 trillion as of June 30, from $668.7 billion in 2003.

But their future is uncertain, Mr. Roseen said. "Whether it's a sticky trend, who knows?"

SUPERSIZED CAPS

"I like [large-caps] more," said Kevin Brosious, president of Wealth Management Inc. of Allentown, Pa., which does not disclose assets. "I wouldn't shy away from them at all, because of the dividend yield."

And some advisers are favoring mega-caps, which include the largest firms, figuring that they may be better able to capitalize on world growth, Mr. Sudame said.

"Another emerging theme is dividends," he said. "We have an aging population and dividends will start to come back. Mega-caps have the ability to pay dividends. Over the long term, we think mega-caps will do well."

Even those who have backed away from large-caps believe they are due for a comeback.

"Eventually the large-cap will be the best thing to invest in again, once we come out of the secular bear market in five to 10 years," said Lou Stanasolovich, president of Legend Financial Advisors Inc. of Pittsburgh, which manages $360 million. In the past two years, he has reduced large-cap exposure to 12% from 20%.

"The moral of the story is diversification," said Andrew Orr, principal and founder of Orr Group LLC of Orlando, Fla., which manages $25 million in assets.

"At any one point in time, any asset class can flat-line. That doesn't mean we shouldn't have money in that asset class. Large-cap stocks are down, but they're not out."

E-mail Sue Asci at sasci@investmentnews.com.