Now might be the time to be bullish while others are not. Morningstar, a leading provider of independent investment research, hosts an annual conference for investment professionals each summer. This year, two veteran mutual fund portfolio managers surprisingly gave a relatively happy outlook for the U.S. equity markets given the European debt crisis; ongoing equity market volatility; investors’ distrust since the 2008 market bottom; a housing crisis; very low U.S. Treasury securities prices, etc.
“Today looks a lot like 1982,” said Brian Rogers, manager of the T. Rowe Price Equity Income Fund. The investment and economic similarities are similar to 1982 except for the low interest rates. (Think of the current economic conditions.)
Rogers said he tries to invest in low price-to-earnings stocks with high yields, which make the current economic environment very attractive. He added we are in a bad place right now but it does not mean the next 10 years will be like the last 10 years.
Think of a quote that some equity managers utilize: “Be fearful when others are greedy; be greedy when others are fearful.” Fund managers on a panel at the conference all agreed that for a CFO to get “outsized” returns, he or she must buy or rebalance when the outlook is fierce.
So let’s assume Europe is one part of your organization’s asset allocation. If your allocation there was 15% at the beginning of the year and is now 10%, these fund managers recommended you rebalance or “average up” your European allocation to 15%.
Receiving better than market returns can occur when you invest against the mainstream thinking. For example, think of the stockmarket runs from 2000 to 2002 and the run since 2008. These were times to achieve outsized gains by increasing your portfolio’s allocation to underperforming asset classes.
One of the most important challenges for every long-term care CFO is properly investing — and rebalancing — the investment portfolio according to the investment policy statement. Many CFOs rely on an investment advisor to help them. Knowing that U.S. markets have a performance history similar to today’s volatility might help the CFO in managing this function.