Many financial advisers are in a mood to buy stocks despite the drubbing their portfolios have taken in the first few trading sessions of 2008.
Both active traders and long-term investors are optimistic because stock prices have dropped low enough to make shares attractive.
"I think you have to be opportunistic," said Michael Joyce, president of JoycePayne Partners of Richmond, Va., which manages $400 million.
"We're not talking about technology stocks in 2001 with no substance behind them," he said. "These are substantial companies" whose stocks are getting battered, Mr. Joyce said.
For instance, the Dow Jones Wilshire 5000 index, the broadest measure of U.S. stocks, fell 5.78% during the first five trading days of 2008, the worst five-day start of a year since the inception of the index in 1979, according to Dow Jones Indexes in New York. The previous worst five-day start occurred in 1991, when stocks dropped 4.39%.
The early January plunge was crushing for many advisers who were optimistic after a rocky fourth quarter.
Nonetheless, some advisers are
buying stocks. "We had a whole list of purchases yesterday and today," said J. David Lewis, president of Knoxville, Tenn.-based Resource Advisory Services Inc., referring to buys made during the last two weeks. His firm manages $65 million.
The views of these advisers dovetail with the findings of a Jan. 2 survey by the National Association of Active Investment Managers, a trade group comprising advisers who prefer trading to long-term buy-and-hold strategies. It showed that members were more optimistic as of that date than at any time in the previous two months, according to the survey. Littleton, Colo.-based NAAIM has 155 member firms managing a total of $17 billion in assets.
The average allocation to equities among the NAAIM advisers had risen to 83% as of Jan. 2, from 75% the previous week.
But that allocation plunged to 41% last Wednesday — a change that reflected discouraging news, including rising unemployment, said Will Hepburn, president of NAAIM.
As a result, he expects tough times and has been selling stocks.
"History suggests we're going to see a 15% to 20% drop" in the stock markets, said Mr. Hepburn, who is also president of Hepburn Capital Management LLC in Prescott, Ariz., which manages $20 million. "Right now, we're down only 4% to 5% on the Dow [Jones Industrial Average] and 6% to 8% on the Nasdaq [Composite Index]."
But the turmoil has served only to encourage Peter Mauthe, president of Rhoads Lucca Capital Management Inc. of Dallas, a NAAIM member firm that manages $140 million.
"This is really an exciting, attractive period of time," he said. "Professionals need to keep their wits about them and understand that bad news is the opportunity engine of the market."
Last Tuesday and Wednesday, Rhoads Lucca removed hedge positions from some of its long positions and purchased stocks with cash.
At times when the market is plunging, the decision to buy stocks is difficult, said Ted Lundgren, managing member of HG Capital Advisors LLC in Houston, a NAAIM member firm that manages $100 million.
"This is not a good time for an exit decision if it's based on fear," he said.
One mutual fund company that pursues an active trading strategy is committed to holding equities.
"We're trying to minimize cash" holdings in our portfolios, said Craig Callahan, founder and president of Icon Advisors Inc. in Castle Rock, Colo.
"This looks like other dips in the past five years," he said. "It's time to stay in [the market] and get rewarded."
What makes this dip similar to others in the recent past is that valuations are 25% below what Icon regards as "fair value," based on its quantitative models, Mr. Callahan added.
Many stocks are valued attractively for the long-term investor, so historic dips shouldn't be a concern, Mr. Joyce said. "We're not trying to catch the bottom, but in three or four years, we'll look back and say, 'That was a really good time to buy financial stocks,'" he said.
Waiting for rock bottom before buying stocks is a losing game, Mr. Lewis said.
"I used to try that, and I got burned 80% of the time," he said.
PREPARED FOR A DIP
Other advisers say that they are basing investment decisions on a client's holdings.
"If things get worse [in the markets], we'll take equities from 55% down to 50% for existing clients" to soften the blow from a downside breakout, said James Shelton, chief investment officer of Houston-based Kanaly Trust Co., which manages $2 billion.
It is a different story for new clients arriving with money from the sale of a business or cash from some other liquidation, Mr. Shelton said. "We are taking advantage [of the market downturn] to get these clients into" equity positions at relatively good valuations, he said.
The best valuations are in companies with products that customers will use regardless of how bad the economy gets, said J. Bryant Evans, portfolio manager of Cozad Asset Management Inc. of Champaign, Ill., which manages $600 million.
"I'm moving money out of consumer discretionary and companies like Best Buy [Co. Inc.], Starbucks [Corp.] and the automobile companies, and into consumer staples companies that sell soap and toilet paper, like Procter & Gamble [Co.] and companies that sell tobacco and beer," he said.
Other advisers think the market's mixed signals are reasons to steer clear of it.
"The macro economy is so opaque that we're stepping aside no matter what," said Sam Sudane, chief investment officer of Schultz Financial Group Inc. in Reno, Nev., which manages $150 million.
Brooke Southall can be reached at [email protected].
