Portfolio Manager Perspectives

Jeff Benjamin

Where there's pain, there's gain: How the unemployment rate can present investment opportunities

Oct 20, 2009 @ 1:18 pm

By Jeff Benjamin

Despite the 60% stock market rally since the March low, many consumers remain fixated on the immediate reality of unemployment, and that is preventing a lot of investors from participating in the rally, according to Kevin Mahn, chief investment officer with Hennion & Walsh Asset Management Inc.

Not only are a lot of investors missing the rally by sitting in cash — there is $3.5 trillion currently earning almost nothing in money market funds — but the reluctance to spend money could stall the economic recovery, added Mr. Mahn, whose firm manages $2 billion.

“High levels of unemployment and concerns over future employment will keep consumers from spending to the levels necessary to develop a sustainable economic recovery,” he said. “In an economy where over 70% of GDP comes from consumer spending, high levels of unemployment over an extended period of time presents a considerable hurdle for an economy that is desperately trying to find its legs again.”

Mr. Mahn still sees areas of potential growth in the fourth quarter, reflected in his allocation to exchange- traded funds that focus specifically on consumer goods and technology.

“We also have long allocations to an ETF that tracks silver, and we feel comfortable with this allocation as silver has similar inflation protection capabilities as are found with gold, while also having more industrial uses than gold,” he said.

The iShares Silver Trust ETF (SLV) has gained more than 36% since the March 9 market low, and is up more than 55% from the start of the year.

Gold, as tracked by the SPDR Gold Shares ETF (GLD), is up 15% from the March low, and up more than 20% for the year.

The S&P 500, by comparison, is up more than 62% from the March low, and is up more than 21% for the year.

Mr. Mahn is hedging some of his long commodity exposure by shorting some areas — such as consumer services and domestic large-cap.

“If third-quarter earnings disappoint and there is a pullback in the equity markets, large-cap stocks, which have run up considerably since the March 9 bottom, and consumer services-oriented companies that have a difficult holiday season staring them in the face, are likely to be most affected,” he said.

“I am certainly cautiously optimistic in the short term, but more optimistic over the longer term, recognizing the days of volatility and uncertainty are not behind us,” Mr. Mahn said. “And we, as portfolio managers, will have to be creative in finding attractive risk-adjusted-return potential throughout the world in the months ahead.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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