Morgan Stanley's global mix sets it apart

It's tilted to equities more than many firms'

Mar 15, 2004 @ 12:01 am

By Brooke Southall

Morgan Stanley is continuing to swim against the tide, sticking with a global asset allocation heavily tilted to equities despite a spike in the bond market last week.

The New York-based wirehouse recommended a mix of 70% equities and 30% fixed-income securities for its global balanced portfolio in a recent report on exchange traded funds.

That equity allocation is 10 percentage points higher than that of its benchmark - 60% Morgan Stanley Capital International All-Country World Index and 40% MSCI World Sovereign bond index.

The firm's asset allocation committee bases its allocation on its outlook of improving economies for stocks and a bond-killing spike in interest rates.

"That's a little surprising because some of the other companies have been taking [global stock positions] back off the table recently," said Derek Jaskulski, strategic analyst with Portland (Maine) Global Advisors LLC, which manages $75 million.

A Morgan Stanley spokeswoman said that her company's asset allocation recommendation for the United States is 65% stocks, 20% bonds and 15% cash.

Indeed, many other financial institutions - and even Warren E. Buffett, chairman of Berkshire Hathaway Inc. in Omaha, Neb. - are constructing portfolios that are taking a different tack.

`chinese wall'

"We had this Chinese wall between asset classes, and it became easy because you filled in the boxes," said Joan Payden, chief executive of Payden & Rygel in Los Angeles, which has $52 billion under management. "It's an exciting time to get out of this box of 70-30, and it's more complicated."

Her firm's asset allocation toward equities ranges from 55% to 65%, she said.

Kevin Bannon, chief investment officer of The Bank of New York Co. Inc., said the equity allocation for the $85 billion he oversees is also down to 55%, though he thinks the odds favor stocks in the long run.

"I've never seriously had to consider the prospect of deflation. I don't think we're that far away," he said.

"I don't think anyone would say it's impossible; that's the major, major change."

Mr. Bannon previously used bonds in a portfolio as both an "anchor" and a source of cash flow. He said he currently uses long-term government bonds as a hedge against deflation.

"You need to protect yourself," Mr. Bannon said.

Meanwhile, Donald S. Peters, principal with Wichita, Kan.-based Central Plains Advisors Inc., said he is heartened to see "mainstream" chief investment officers boost their long-term-bond allocations in response to what he has been publicly preaching is a false economic recovery.

"It's starting to creep into their minds," he said.

"All these 70-30 guys are coming to the conclusion that we have a different kind of recovery; the mainstream is starting to move toward this view."

Mr. Peters, who manages $35 million, said he uses a fifty-fifty allocation and that the 50% slated for stocks is being held in cash.

S. Timothy Kochis, chief executive of Kochis Fitz Tracy Fitzhugh & Gott Inc. in San Francisco, said he also has a problem with Morgan Stanley's asset allocation.

`flesh and blood'

"We come at it differently from Morgan Stanley, which uses an institutional approach," he said. "All our clients are flesh-and-blood individuals."

The result is that Mr. Kochis keeps the bulk of his company's $700 million in assets under management in portfolios of 100% equities, he said.

"It's ironic, but playing it safe is taking short-term risk," he said.

"What you're worried about is the forever. In the long run, you get paid off very handsomely for taking the short-term risk."

Certainly, Mr. Buffett is taking a new approach to risk. Berkshire Hathaway has $36 billion in cash, including $12 billion in foreign currencies.

"During 2002, we entered the foreign-currency market for the first time in my life," he recently wrote to shareholders.

"And in 2003, we enlarged our position."

According to Mr. Bannon, alternative investments such as hedge funds and private equity now represent 20% of his company's portfolios.

Ms. Payden said her company is using more alternatives in addition to lacing stock and bond holdings with international positions.

"You can have an aggressive portfolio at 50-50 and a more conservative portfolio at 70-30. That's the challenge of today," she said.

Indeed, Mr. Kochis said, investors shouldn't necessarily be concerned if asset allocations are all over the map.

"If everyone were in the same place, I'd be suspicious because people's return appetite and risk tolerance are different," he said.

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