Investment Strategies

Advisers brace for slower growth

Dec 2, 2012 @ 12:01 am

By Dan Jamieson

Like everyone else, financial advisers are bracing themselves and their clients for a long-term slowdown in U.S. economic growth.

Although the Commerce Department reported last week that the economy grew at a faster-than-expected 2.7% annual rate from July through September, that growth is expected to slow significantly in the months ahead because of Hurricane Sandy and uncertainty about tax hikes and spending cuts.

Over the long term, a growing chorus of experts predict an even more significant slowdown in gross domestic product growth as baby boomers age.

That has some advisers, such as Todd Ganos, looking for new investment options.

“I'm moving to more international,” said Mr. Ganos, a principal at Integrated Wealth Counsel LLC.

With declining or flat populations in Europe, Japan and the United States, “you have to look to other Asian, Latin American and emerging markets,” he said. “That's where the growth is.”


Decent returns with reduced volatility are “going to need to come from a pretty broad mix of asset classes,” said William Paxton, principal at Davidson & Garrard Inc., who has been warning clients about the slow-growth environment.

He uses dividend-paying stocks, master limited partnerships, real estate investment trusts, non-U.S. bonds, gold and absolute-return strategies.

Jeremy Grantham, GMO LLC's chief investment strategist, lit up the slower-growth debate late last month with a report predicting that the U.S. economy will grow at just 1.4% in the near future, not the 3%-plus average of the past 100 years.

In simple terms, growth in population, employment and productivity combine to determine GDP growth.

Mr. Grantham thinks that all three are declining.

And while other economists and analysts — most notably Bill Gross and Mohamed El-Erian of Pacific Investment Management Co. LLC — share his view, not everyone agrees with his dire outlook or even thinks that would be cause for alarm, should it come to pass.

Developed-country growth rates have been “remarkably stable” for two centuries at about 1.8% a year, Laurence Siegel, director of research at the Research Foundation of the CFA Institute, wrote in an article in the November-December Financial Analysts Journal.

“There is every reason to expect the long-term trend to continue,” he wrote in the article, “Fewer, Richer, Greener.”

An aging population indeed will put a drag on productivity growth, Mr. Siegel added in an interview. ”But what you're trying to get at is prosperity, and [productivity growth] isn't a completely reliable measure of it.”

Per-capita GDP is a better yardstick and can fall with rapid increases in population, he said.

In his article, Mr. Siegel predicts that productivity growth should continue apace since “creativity and invention have not stopped, but seem to be accelerating further.”

Money manager Research Affiliates LLC has been pounding the low-growth drum for some time and, like Mr. Grantham, bases its gloomy forecasts in part on population trends.

Christopher Brightman, head of investment management at Research Affiliates, beat Mr. Gran-tham to the punch last month with a research piece titled “1% ... The New Normal Growth Rate?”

GDP growth “will be much closer to 1% over the next two to three decades” than the 3.5% the U.S. historically has enjoyed, Mr. Brightman said.

He conceded that productivity growth “is notoriously difficult to pin down, so if those productivity numbers vary, I wouldn't be surprised.”

Productivity numbers can be “sort of a mystery,” agrees Scott Brown, chief economist at Raymond James & Associates Inc.

Mr. Brown thinks productivity gains will run from 1% to 1.5% per year over the next decade, and combined with population growth of about 1% will produce U.S. GDP growth of 2% to 2.5%.

For advisers, raising the specter of slow growth is important, even if it is not clear how slower global growth might affect equity markets.

“One of the most important things we can do is manage expectations, and if Mr. Grantham and Research Affiliates are trying to reset expectations, good for them,” said Tom Sedoric, an adviser with Wells Fargo Advisors.

“We [advisers] should be doing the same,” he said. Twitter: @dvjamieson


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