Clients should be sitting on some cash — and should not be fully invested
Europe is an undervalued mess, the emerging markets are overvalued and investors are wasting their time worrying about interest rate hikes.
Those are the essential takeaways from a panel of investment experts who spoke Thursday in Chicago as part of the Morningstar Inc. Investment Conference.
“It's really tough to earn a decent real return in this environment, largely because of central bank policies around the world,” said James Montier, a member of the asset allocation team at GMO LLC.
“The best hope investors have right now is that the pendulum will continue to swing,” he said. “Right now, you don't want to be fully invested, and you need to keep some dry powder to be able to take advantages of the opportunities.”
Although the panelists for the session focusing on the macroeconomic landscape didn't agree on everything, they each offered colorful perspectives in the way of advice.
Mr. Montier, for example, drove his point home on holding some cash by quoting Winnie the Pooh, saying, “Never underestimate the value of doing nothing.”
Michael Mendelson, a portfolio manager with AQR Funds, stressed the need for diversification and advised against leveraged strategies.
“Try to create a portfolio where you're at least accessing as many sources of return as possible,” he said.
“I am a big believer in diversification. We can't change the world, so let's try to create a better risk-adjusted-return portfolio,” Mr. Mendelson said.
On leverage, he said, “I don't like to use high amounts of leverage in anything, and I would only use leverage if I was simultaneously helping myself somewhere else, such as concentration risk.”
The increased focus on the Federal Reserve's extended quantitative-easing policy has been overblown and become an unnecessary distraction for the markets, according to Richard Bernstein, chief executive of Richard Bernstein Advisors LLC.
“The Fed is always late and is usually very, very lagging,” he said. “It's our estimation the Fed will be more lagging than normal in this environment, and I don't think the Fed is that stupid that they will let all the work they've done over the past few years fall apart in a couple of weeks.”
Mr. Montier agreed. “There doesn't seem to be that much economic evidence that the Fed should be tightening anytime soon. I don't really see where this threat of inflation is coming from.”
On Europe, the panel agreed that it is in rough shape, but not everyone agreed that this is the time to invest.
“I think Europe has a lot of trouble,” Mr. Mendelsons said. “Policy is bad and risk is high, and maybe that's why there's value there.”
Mr. Bernstein said that he will hold off on Europe until “the pain in Germany gets worse; that's when we'll get bullish on Europe.”
Mr. Montier was most enthusiastic.
“We like Europe,” he said. “We think it's the one place that actually has some value.”
