John Wasik

Three portfolio strategies to hedge political risk

Oct 21, 2013 17:50 UTC

CHICAGO (Reuters) – For angst-addled market watchers, the U.S. debt ceiling and budget chaos has been like one of those amusement-park rides in which you ride upside down. It’s harrowing and probably not over yet.

In addition to market and credit risk in the stock and bond markets, you need to be acutely aware of political risk. That means finding pockets of profit that are not dependent upon Washington.

Here are three strategies:

1. Balance risk in one fund

If you’re a fairly moderate to conservative investor, having a balanced fund as a core holding could replace several funds that hold just stocks or bonds. While you’re not entirely insulated from political risk, it’s more of a hedge than being completely exposed to stocks or bonds. But can you get one mutual fund to do this for you in a tactical way?

The Oakmark Equity and Income Fund is an actively managed fund that shifts between stocks, bonds and cash. But the Oakmark fund is not your typical 60-percent stocks, 40-percent bond mix. The fund can invest up to 35 percent of its assets in non-U.S. securities, which it has done with stakes in Nestle S.A. ADR and Diageo PLC ADR.

Unlike most balanced funds, it has nearly three-quarters of its assets in stocks, with about a quarter in bonds and cash. It’s done well to date; it’s up 18 percent for the year through October 18, compared with 12 percent for a Morningstar moderate-risk index. The fund charges 0.78 percent annually for expenses.

How to navigate the troubled municipal bond market

Oct 15, 2013 19:45 UTC

CHICAGO (Reuters) – If you can avert your eyes from the federal government’s budget and debt-ceiling crisis, you may spot more trouble ahead in the state and local municipal bond markets.

Detroit’s bankruptcy, Puerto Rico’s fiscal woes and unfunded pension liabilities in other states and cities are giving the nearly $4 trillion muni bond market the jitters. Investors have been yanking money out of muni bond funds for more than seven months – triggering redemptions of almost $50 billion since March, according to Morningstar.

That beats the nearly $45 billion in outflows from November 2010 to August 2011, when some soothsayers were predicting massive defaults based on weakening state and local finances and pension liabilities. And the exodus is far from over as the muni bond market heads for one of its worst years in the past half decade.

Circuit breakers investors can use for a debt default

Oct 7, 2013 18:23 UTC

CHICAGO (Reuters) – In times of calamity, every portfolio needs a set of circuit breakers.

And, as Congress speeds toward the debt-ceiling barrier, it is a good idea to consider some inverse exchange-traded funds(ETFs) that move in the opposite direction of stock and bond indexes.

The first major hurdle is October 17, when the Treasury will need authority to sell more debt securities – or face default on its obligations. What if markets get spooked over Washington’s inability to reach a consensus on fiscal matters? If traders truly believe that Congress won’t issue more debt to pay bills it has already racked up, that will send interest rates on Treasury paper soaring.

Demographics will drive the ‘new normal’ economy

Sep 30, 2013 22:27 UTC

CHICAGO (Reuters) – One of the most difficult terms to understand in long-term investing nowadays is “new normal.”

Coined by PIMCO Chief Executive Mohamed El-Erian, it means the “world of muted growth” that followed the 2008 meltdown. And although stock returns have been strong this year, down the road, the “new normal” will largely be driven by demographic forces.

And unless the current fight over the U.S. government’s debt limit forces a deep and prolonged market meltdown, now is the time to focus on an investment strategy with a longer view.

Three ways to profit from the taper tempest

Sep 23, 2013 19:31 UTC

CHICAGO (Reuters) – After the Federal Reserve’s revelation last week that it would not be trimming its bond-buying stimulus program, the storm clouds menacing the stock and bond markets parted.

Investors in both markets relish the prospect of cheap money continuing to fill the coffers of banks and corporations. The Fed has been buying Treasury securities at the rate of $85 billion a month to keep interest rates low and stimulate the economy.

U.S. stock market indexes hit all-time highs on September 18 in the wake of the Fed’s announcement, followed by gains on overseas exchanges the following day. The Standard & Poor’s 500-stock index is up almost 22 percent year to date through September 20. Bond prices have also recovered, as yields fell from the 3 percent range in recent weeks to about 2.74 percent. As yields fall, bond prices rise.

Five investment lessons from the Lehman Brothers blow-up

Sep 17, 2013 12:00 UTC

CHICAGO, Sept 17 (Reuters) – Five years ago I was watching
the world financial system implode after the failure of Lehman
Brothers in real time. Since I’m largely a buy-and-hold
investor, I grimaced while my retirement savings took a
pummeling in 2008-2009.

What have we learned since that calamitous year? There were
certainly a few gut-wrenching surprises as well as some enduring
truths that still hold in personal investing for the future.

1. Gravity is stronger than diversification

For years, we adherents to the Modern Portfolio Theory of
diversification have practiced the fine art of blending our
portfolios with assets that don’t typically move together. In
2008, many, including me, were surprised when commodities funds,
which were supposed to move in the opposite direction of stocks,
followed stocks into the abyss. When nearly everything declines
in a global meltdown, there are few safe havens.

Why dividend-growing stocks are beating bonds

Sep 9, 2013 19:08 UTC

CHICAGO, Sept 9 (Reuters) – With all the angst in the market
lately about rising rates bruising bond prices, where can you
find reasonable income with less sensitivity to interest-rate

The answer, surprisingly enough, is dividend-growing stocks.
These cash-rich companies not only have the ability to raise
payouts but their returns are still competitive with bonds in a
low-rate environment.

Dividend growers can offer better performance than bonds
because total return rises as the dividend yield is increased.
(Total return is a stock’s appreciation plus reinvestment of
dividends and capital gains before taxes.)

Use convertibles to straddle stock and bond markets

Sep 3, 2013 16:25 UTC

CHICAGO, Sept 3 (Reuters) – As bonds that can be converted
into stocks, convertibles are securities that long-term
investors can learn to love.

Just like regular bonds, convertible bonds have a maturity
date, coupon payment and face value. As an enticement to
investors, though, they can be converted into common stocks at a
later date. While their yields are not as high as conventional
bonds, the conversion feature offers you a potential stock play
at lower risk.

With anxiety mounting over the Federal Reserve’s next Open
Market Committee meeting – and whether it will back off its
bond-buying program – convertibles may represent a little-known
sweet spot between pure income investing and the stock market.

Another key factor for stock investors to watch

Aug 27, 2013 16:32 UTC

CHICAGO (Reuters) – It’s well known that small-company stocks have outperformed large-company stocks in terms of average annualized return since the 1920s, and bargain-priced stocks tend to outperform growth stocks.

Now there’s another factor worth watching: direct profitability.

Recent research by money management firm Dimensional Fund Advisors (DFA) shows a significant premium over time for investing in companies with high direct profitability – and you can adjust your portfolio accordingly to reap those outsized gains.

DFA’s definition of direct profitability is a bit technical: operating income before depreciation and amortization minus interest expense. In non-accounting terms, companies with high direct profitability are expected to have better returns than those with lower direct profitability.

Preferred stocks still make sense for yield

Aug 20, 2013 12:01 UTC

CHICAGO (Reuters) – Frustrated yield seekers have been drawn to preferred stocks because they offer a several-point yield advantage over most U.S. investment grade bonds, including Treasuries, corporates and municipal bonds.

But these quasi-stock, quasi-bond investments act like bonds when interest rates rise: They fall in value. That has brought them some negative attention in the last few months. Preferred stocks declined in value as investors scrambled to find higher-yielding vehicles when rates rose. They may now may be oversold and offer some bargains.

Preferreds straddle a territory between common stocks and bonds. Mostly issued by financial companies, preferred stocks confer no voting rights, but represent a higher claim on earnings than common stocks, and are less volatile.