Advisers bullish on equities

Financial advisers are upbeat about prospects for stocks in 2011, with many predicting that last year’s broad market surge will continue into this year.

That good feeling is likely to translate into advising more clients to buy stocks. In fact, 63.4% of advisers responding to the 2011 InvestmentNews Outlook survey said they will advise clients to increase their equity allocation this year. That’s a substantial shift from a year ago, when 48.6% said they wanted clients to increase their exposure to equities.

The “buy” recommendation includes international equities, with 60.2% of responding advisers saying they will advise clients this year to increase exposure to those markets. InvestmentNews did not ask that question of advisers last year.

BURST OF ENERGY

Nearly 33% of surveyed advisers said they expect energy and natural resources to be the best-performing sector in 2011, followed by technology at 27.4% and financials at 14.9%.

Conversely, 23.9% expect utilities to be the worst performer in 2011, followed by financials (20.7%) and health care (19.7%).

In the bond market, advisers are waiting for the other shoe to drop in the form of higher interest rates. According to the survey, only 18.8% said that they will advise clients to increase their allocations to fixed income, a decline from the 36.9% who said last year they would recommend an increase.

A majority (51%) of advisers said long-term government bonds would be the worst-performing type of fixed-income investment in 2011, followed by municipals (13.9%) and money market funds (11.3%).

A majority of the more than 1,223 advisers responding to the survey said that both the Dow Jones Industrial Average and the S&P 500 will rise this year.

Sixty-three percent of the advisers surveyed said the Dow will finish above 12,001 and 53% said the S&P 500 will finish above 1,301.

Financial advisers, however, are not so sanguine in their outlook for the technology-heavy Nasdaq Composite Index. The largest percentage of advisers surveyed, 30.1%, said the Nasdaq will finish 2011 in its current range of 2,601 to 2,800.

At the close of trading last Wednesday, the Nasdaq stood at 2,666.93, up 17.5% for the year. The Dow and the S&P 500 also were up for 2010, gaining 11.1% and 13.0%, respectively.

The increase eased advisers’ anxieties after two years of market volatility and turmoil.

There remain many skeptics who think the optimistic outlook about putting clients’ assets back into equities is misguided.

“That high a percentage [63.4%] looking to [increase clients’ exposure to equities] is a little bit scary,” said Larry Taunt, chief executive of Regal Financial Group, which has 95 registered reps and advisers and controls about $1 billion in client assets. “I am optimistic for the year, but I am cautious.”

“It will be a good year, but any number of areas could be poor to mediocre at best,” said Malcolm Makin, president of Professional Planning Group. “Be prepared for a lot of volatility and to absorb a lot of bad news.”

Mr. Taunt expects interest rates to rise, fueling some inflation. “This current interest rate environment is unsustainable, but a rise in interest rates would show confidence in the broad economy. It would show that the stimulus of low rates is no longer needed.”

He said he’s preparing to move customers out of traditional fixed-income funds into floating-rate funds, which generally invest in floating-rate bank loans, bonds and other debt securities.

Mr. Makin is looking at commodities mutual funds for clients but has not yet pulled the trigger to invest. “Gold owners could be pummeled if the stock market takes off,” said Mr. Makin, whose firm controls $433 million in client assets.

Advisers said their biggest concern for the economy in 2011 is unemployment, with 58.8% saying that reducing joblessness should be this year’s highest economic priority. Reducing the federal deficit is respondents’ next-biggest concern, mentioned by 32.9%.

Several advisers noted that in an economic recovery, corporate earnings return first, followed by jobs.

“Somewhere along the line, people need to go back to work,” said Jeffrey Vahanian, president of Vahanian & Associates Financial Planning Inc., which oversees $79 million in client assets. He said that his typical client portfolio is more defensive in fixed income and “leaning toward the high end of the risk-tolerance range for stocks.”

Some advisers are looking beyond traditional asset classes and investments seeking returns for clients.

BOND FUND SHIFT

The biggest change in a typical client’s portfolio is a move to non-traditional bond funds — those investing in floating-rate loans, high-yield corporates and international or emerging-markets issues — said Bill Carter, president of Carter Financial Management, which controls $800 million in client assets.

As recently as a few years ago, a client’s fixed-income portfolio would have been allotted to a more traditional bond fund such as the Total Return Fund for Pacific Investment Management Co. LLC, he said.

Again, optimism and caution are intertwined. “All kinds of land mines out there are waiting to go off,” said Mr. Carter, noting speculation about which European country will be next to face a fiscal crisis. “Now the world is so international, investing is much more difficult than it was 10, 20 or 30 years ago.”

The online survey was conducted Dec. 7-20.

E-mail Bruce Kelly at [email protected].