Advisers braced for inflation — if it ever shows up

Advisers braced for inflation — if it ever shows up
Still investing in defensive bond portfolios despite long patch of stable prices
AUG 10, 2011
QE2 has ended. The budget ceiling impasse in Washington drags on. And the eurozone is unraveling. That's why most advisers seem to be hanging on with bond portfolios — despite being wrong so far that rates are on the rise. Nevertheless, stretching for yield or lowering quality is too risky, they feel. Fixed-income investors can buy "either high-grade corporates or municipals — that's it," said Saverio "Sam" Paglioni, a partner at Integer Wealth Advisors Group LLC, which runs about $230 million. "They can't leave it in cash" and get a negative real return, he said. "The question is not if rates go up; the question is: Are you ready for higher rates?" said Dave Pequet, president of MPI Investment Management Inc., which manages $320 million in short-term-bond strategies. Mr. Pequet said he has been "very cautious" since the beginning of 2009, when he dumped all his U.S. Treasury holdings. Since then, his clients have been overweight in mortgage-backed and U.S. agency bonds. He expects to shorten up his current three-year average duration in anticipation that the zero-rate policy of the Federal Reserve has to end at some point. Advisers said the current hoopla about extending the U.S. debt ceiling isn't too much of a concern, as they expect a deal to ensue. "Only one client called about the impact of [the debate in] D.C.," Mr. Paglioni said. "There was a lot more [client] concern when Meredith Whitney was talking about municipal Armageddon," said Mr. Paglioni, referring to the chief executive of an eponymous advisory firm.
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