Are investors too optimistic about the markets?

This week on WealthTrack: How do you build financial security for a lifetime? That's the job of two chief investment strategists for two top-rated insurance companies. New York Life's John Kim and Western and Southern Fort Washington Investment Advisors' Nick Sargen show us the building blocks for their portfolios next on Consuelo Mack WealthTrack. -I'm worried about the general level of complacency in the market place. So-- in that summer of '11 Consuelo but coming in to 2012, there was a fair bit of pessimism in the market place. Seventy percent of investors thought that the Eurozone might break apart. We're very concern about the continuation of the Kiwi programs and the like. And as a result, I believe the markets corporate earnings, multiple expansion, all sorts of surprised us on the positive here. There's a remarkable calm in the market place today. Many of our cohorts seemed to me more optimistic than not and perhaps it's the contrarian in me suggests that I'm just concerned that we're all too optimistic and we're too complacent about the year ahead. -So is there anything that you are doing as far as your investment strategy as a result of that? -Yes we are. -What? -We're basically-- we still like risk assets like equities and high yield bonds and even high grade bonds that are more in the speculative side here but we're just increasing the credit quality of all our risk assets a notch here so whether it's equities we wanna go into higher quality equities on the fixed income side again while we still like high yield bonds we might wanna move a little bit on the higher end of the high yield sector. -Which is exactly the opposite of what other professional investors who are complacent and optimistic-- -Indeed. -would be doing at this point. -That's right. They still have the risk create on fully as you can see it. -Right. So what are you worried about? -You know what, it's interesting as I was listening to John, I can see where he's coming from and yet I have a slightly different take. For example, I certainly agree that in some of the risk assets in the bond market where we asked ourselves today even investment create credits. Are we being paid for the credit risk we're taking with the spread so now, the yield spread so now? -Right. And then again, yield spreads the debits between the short term and the long term. -Exactly. But here's the difference on-- so I think the complacency is on the bond side. -Uh-hmm. -The stock market as head of phenomenal run but I think quite frankly many people missed it and why do I say that? Consuelo, I looked at, you know, mutual fund flows up until the beginning of this year, a steady pattern of outflows from equity mutual funds and ETFs in the bund. -Oh, absolutely. -Then you could say, well what about maybe not so much the institutional masters? But even there, I saw something that was really surprising to me recently is on pension funds. Their allocations to equities after the financial crisis came down. I think it used to be 55 percent, 39 percent. Their allocations to bonds went up from 22 percent to the mid 30s. And so what I'm saying is that the differences. I agree with John on the bond side. I still think that there is more legs to the stock probably even though we may have a pullback. But that I don't worry that the investors are overly positive on the start but it's-- -On the start. -On the equity side, the only concern I have about the equity side is that last year, 16 percent performance of the SMP 500-- -Yes. -was really generated by a pretty mature and multiple expansion. Now it was off of a fairly low PE multiples so I calibrate something called the Trend PE Ratio and that end of the year at 17 times earnings multiple. That's a historic average so the equity market is only cheap. This will be the bond market. First it's historical averages. It's about fairly value. So I am a little bit more cautious than Nick is that the equity market well it might have some more room to improve that there might be a limitations to that. That's why I don't think it's gonna realize the total return growth that we experienced in 2012. -So where do you go for income which I know that you two were searching the world for income because of the obligations you have to be as insurance companies? -Absolutely. Well, you know, it's interesting when John talked about the real estate investment trust. Our favorite play has been dividend paying stocks, high dividend paying stocks for, you know, for the reason as I said, we look today and we go-- we have to buy a high quality corporate bond we can't put it on our books for 4 percent on yield. Yet, we are able to find in the stock market same companies maybe issuing stocks that have dividend yields above 4 percent. -Uh-hmm. -So, for us it's a no-brainer in two respects that we're getting comparable yield. But at the same time, we do believe over long run the stock market will outperform the bond market. So I'd rather hitch my horse to market that can go up in value rather than hitch my horse to an asset that I think will decline in value. You know, there are been-- we have a whole range of initiatives of, you know, some are master limited partnerships that we've looked into. We've looked into alternative investment, vehicles that pay higher yields than what a conventional bond would be. So I would say that, you know, in the last couple of years I could easily take off maybe 8 new initiatives. We have two offset this very low interest rate requirement. -Right. And where are you looking for income? -So, equity real estate? -Uh-hmm. -The higher quality and of the high yield segment recognizing that spreads for the high yield sector have really common significantly. One of the reasons why it was one of the best performing sectors last year. I think the international [unk] offers value especially if you have diversified strategy of both equities and fixed income developed and developing. You can generate some yields that are quite attractive.