Here's Part 2
Big Money Poll -- Part 2
Cover Story, Part 1
Yet Eugene Sit, a well-known growth-stock manager and proprietor of Sit Investment Associates in Minneapolis, thinks the bull/bear face-off will continue for at least another year. Investors, he notes, can cheer "a very solid fundamental outlook with respect to long-term economic growth and earnings prospects; the soundness of American fiscal and monetary policies, and the fact that America's back [as the preeminent global power] which has strongly positive implications for the U.S. dollar longer-term."
But that good flag-raising stuff is not the total picture. "Stock valuations are high," Sit says. "The Fed is not our friend on a short-term basis. The rest of the world is coming back to life, which causes a cyclical uptrend in inflation. And lastly, the breadth of the market has been poor. Own the wrong stock, and you've been taken to the cleaners."
In the short term, Sit predicts, "neither bull nor bear will be satisfied." His best guess: the Dow will trade between 9500 and 11,000 for the next 18 months.
If stocks can't climb convincingly beyond their prior peaks, over time the public will lose interest in the market. But a bull market of another and far more dismal sort stands ready to claim the citizenry's attention. We refer, of course, to the race for the White House (at the moment, it's more like a jog), which culminates with next fall's Presidential election.
In May, 67% of poll participants predicted that George W. Bush would win the general election. About 69% hold that view today. But the big news relates to the Democrats: A solid 20% of managers think Bill Bradley will get the keys to the Oval Office, compared with only 4% last spring. Meanwhile, Al Gore's chances with this crowd have plummeted like those of a company that not only misses its numbers but discovers it's got accounting problems, to boot.
Just 6% of those polled by Barron's think Gore will move into his buddy Bill's old digs. Back in May, 18.5% gave the Vice President a better-than-even chance. If anything, the Big Money findings suggest that Bradley has a better shot than Gore at beating Mr. Bush.
Considering that Bill Bradley and Al Gore share similar views on the issues, and that neither boasts a high-wattage public demeanor, what has caused the chasm in poll standings? Ed Shill, of QCI Asset Management, blames Gore's drop, in part, on "the Clinton-fatigue factor." And he's not the only one.
Last spring, at the height of the Kosovo conflict, many managers believed that foreign policy and defense issues would frame the 2000 election debate. In the absence of a military or economic crisis, the managers now have reverted to brooding about "character" and "ethics"; many consider the combo the most compelling election issue. Other key concerns range from taxes to health care to education, all of which, it's safe to say, you'll be hearing a lot more about in the months ahead.
Which investment themes will dominate discourse on Wall Street as the century ends? (Okay, purists, no calls or letters, please; we know it doesn't really end 'til 2000 is over.)
According to the Big Money panelists, corporations' global competitiveness will become an even more pressing concern. "We'll see more global alliances, consolidations and acquisitions," predicts Richard Meckler, of Liberty View Capital Management, in Jersey City, New Jersey. "There's a huge rise in global competition, and the stakes are getting higher."
Meckler contends that global companies are best-equipped to compete in the global economy -- a view shared by more than a few of his fellow respondents. That could bode ill for many smaller companies as well as for small-cap stocks in the coming year. "The trend away from small-cap investing is not just a factor of the prominence of S&P 500 Index funds, but reflects the fact that global competition requires larger companies to compete. That's why so many smaller companies will continue to be bought up by larger ones," Meckler says.
The managers' equity allocations clearly reflect a big-cap bias. As a group, they've placed an average 62% of their equity assets in large-capitalization stocks, up from 59% in May. Mid-caps now account for only 21% of their equity holdings, down from 23% last spring. And small stocks account for just 16% of their portfolios, down from 18% last May.
Again, these figures are only mean calculations. Remember, too, that some managers are prohibited by charter from venturing across capitalization borders.
So far as asset classes go, the Big Money crowd loves stocks. The average portfolio manager currently has 66% of his clients' assets in equities, compared with 18% in bonds and 15% in cash. Over the next 12 months, however, the managers plan to raise their stock exposure to an average 72%, a shift in keeping with their long-term bullish posture. And they're looking for a mean 15% return from stocks, compared with 12% six months ago.
Although poll panelists expect bond yields to hover near 6%, they plan to cut their bond weightings progressively, from 18.4% to 17.5% to 17% of portfolio assets over the next 12 months. Recall, however, that some managers have more freedom to shift their allocations as market conditions warrant, while others are bound by charter to maintain set proportions of stocks, bonds and cash.
Many money managers, like the rest of us, free their personal portfolios from the investment constraints of their professional lives. Thus, it's interesting to note that the managers have placed 73% of their own financial assets in stocks. That's down from a startling 79.5% six months ago, but stands a full 7% above their clients' equity allocations.
Ironically, the managers would have been better off lightening up on their own stock exposure: 61% of our crowd is beating the S&P 500 at the office, but only 56% is besting it at home.
For the past three years, the Big Money poll has been conducted for Barron's by Beta Research, of Syosset, New York. The latest poll drew responses from 165 money managers, ranging from the owners of small boutiques directing less than $25 million to the principals of giant financial concerns. About 10% of poll participants work for firms that manage more than $5 billion in client funds. The managers are about evenly split between growth and value investors, although their ranks include asset-allocation experts, fixed-income pros and derivatives specialists, as well. The group's investment focus is primarily domestic, although the managers keep a close watch on companies and markets overseas.
The Big Money men and women expect the S&P 500 to ring out the year at 1294, while climbing to 1355 by mid-2000. (The popular benchmark was trading below 1320 at the time the poll was mailed.) A handful of managers think the S&P will dip below 900 during the coming year; conversely, 13% of those responding look for the index to top 1500, including a particularly hopeful 5% who are banking on 1600.
The Nasdaq Composite on its own has been one of the world's great wonders this year, alternately plunging and soaring as investors have changed their views of technology stocks. Two weeks ago, tech was drek. Last week, it was the answer to every portfolio manager's prayers, as evidenced by the Nasdaq's blistering rally Friday, which carried the index to a new high of 2966, well above the 2814 level at which it traded when the managers filled in their surveys. At that time, the Big Money folks thought the Nasdaq would end the year at 2736, before climbing to 2904 by June. And, as history repeatedly has shown, they still might be right on both counts.
Our managers long have been of mixed minds about technology shares, although they're net positive-make that wildly positive-about the tech sector at the moment. Says Erik Gustafson, of Stein Roe, "We own companies that build the infrastructure of the Internet: Cisco Systems, Motorola, Lucent Technologies. We own companies that carry the data on that infrastructure: MCI WorldCom and Qwest. And we own companies that store the data, such as EMC. In that package you own the Information Age."
But James A.M. Douglas, of Douglas Nayes in New York, looks at things a bit differently. "Cisco's our largest position, and it doesn't seem to lose its luster," he says. "We also like voice transmission companies, even the Baby Bells."
But EMC? "I think it's a Y2K fear story -- fear of losing your data," Douglas says. "We sold our position, although we did very well. EMC remains a great company, but I don't see it achieving the growth rate in the future that it enjoyed in the past." EMC's shares have more than doubled over the past 12 months, and the stock now sells for 52 times estimated 2000 earnings of $1.41 a share. This year, the company is likely to earn $1.08, according to First Call, an estimate-tracking service.
The Big Money managers use the Internet -- love it, in fact, and think its power to change society is profound. But that doesn't mean they hold the same boundless affection for Internet stocks, particularly e-commerce and Website operators. As in May, Amazon.com tops the current list of stocks that this crowd finds most overvalued. America Online is a distant second, followed by eBay, Microsoft and Yahoo.
What's the big beef with the giant bookseller and sundry other Web plays? "Show me the money," the Big Money managers say. Just don't look to Amazon, which last week confessed it expects to lose far more in the current quarter than it previously had thought.
Ed Meckler of Liberty View thinks the "most prudent" Internet investment is a broad-based basket of puts. "For every few winners there will be many more losers, because the cost structure is rising so rapidly," he says.
On the 'Net, many Websites barter space with each other for advertising and promotion. But in the bricks-and-mortar world, it costs cold, hard cash to advertise in print, on radio and on TV. "We've been told that 8%-10% of all radio advertising now, particularly among new advertisers, is Internet-related," Meckler says. "You can only play the game for so long of trying to generate revenues without any focus on costs. The original plan was to do that and, like Amazon, become so well known that you don't have to do it anymore. But now that there are players in every field on the Web, fighting for market share has become much more expensive."
What else do the Big Money managers like? Health care is their second favorite sector, and pharmaceuticals are among their most beloved stocks. "We've been adding to Pfizer and Johnson & Johnson, and even to Cardinal Health, a broken-down drug distributor," Erik Gustafson says. "Pfizer and Johnson & Johnson are riding the demographic wave, and both have outstanding product pipelines. Cardinal will distribute the drugs, and they'll be sold through retail outlets like Walgreen, which is the dominant dispenser of pharmaceuticals in the world. The company's been compounding returns at 25% a year." Walgreen's shares could use a shot in the arm, however. At 25, they're a bit above their 52-week low and well below their 52-week high of 33 15/16.
The managers also like financial stocks, partly because they don't think the market has much to fear right now from higher rates. Ed Meckler's playing the sector, in part, through Berkshire Hathaway, Warren Buffett's investment vehicle, which has had a rougher year than many Buffett fans expected. The Class A shares fell from a high of $81,100 to a low of $54,200 before rebounding, and now change hands -- infrequently -- around $63,600. "The core of the company is insurers General Re and GEICO," Meckler observes. "Pricing in the industry has been highly depressed, but we're starting to see some rationalization. The insurance sector is trading close to book value, so there's not much downside risk."
In all, Big Money participants don't see a lot of downside risk for the broader market, at least over the next 12 months. "The economy has never been better, and we've never had a better Fed," says Michael Farr of Farr Miller & Washington, in Washington, D.C. "The slashing and burning that went on in American companies in the aftermath of the 1980s has brought more pennies to the bottom line than at almost any time in our nation's history. Five years from now, 10 years from now, we'll all have more money."
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