in the mean time, just in in-tray
Subject: Thoughts for the Week - Insights from the Desert -
One of the advantages of running a boutique wealth management business within a big, global, financial company like Morgan Stanley Smith Barney is that it gives us access to resources that we could not afford on a stand-alone basis. Last week was a good example. I spent two days at a Morgan Stanley Smith Barney Consulting Group meeting in Phoenix. The Consulting Group consists of 210 investment professionals including 38 who conduct due-diligence and on-going evaluations of third party equity and fixed income managers, and roughly 50 who do the same thing for alternative investments - private equity, real estate, hedge funds, managed futures and the like. The meeting brought together some of the top advisors in the firm, Consulting Group professionals, and a stellar group of speakers and panelists including:
Jeremey Siegel, (author of Stocks for the Long Run) from the Wharton School of the University of Pennsylvania
Richard Marston, Professor of Finance and Economics at the Wharton School .
Marvin Zonis, Professor Emeritus at the University of Chicago Booth School, and a leading authority on the Middle East .
Toby Moskowitz, Professor of Finance at the University of Chicago and 2007 winner of the Fischer Black Prize as the top finance scholar under the age of 40 years.
Jeffrey Applegate, Chief Investment Officer, Morgan Stanley Smith Barney.
Tony Crescenzi, Senior Strategist and Portfolio Manager, PIMCO.
Mike Moody, Senior Portfolio Manager, Dorsey Wright & Associates.
Geoff Colvin, Senior Editor at Large Fortune magazine, author of the bestselling book, Talent Is Overrated.
Ron Insana, CNBC Senior Analyst and Commentator.
Paul Sullivan, author of the Wealth Matters column for the New York Times.
Meetings like this tend to be a bit like drinking from a firehose - refreshing, but tough to swallow all of the information - As always I take a lot of notes. Here are some sound bites, key questions and themes that I took away from the meeting. All opinions are those of the speakers, and not those of us or Morgan Stanley Smith Barney.
The Global Economy - Geoff Colvin
While worry and risk aversion remain high in the United States ,the global economy is growing, and innovation and wealth creation are booming.
The global economy is on track to grow about 4.5% in 2011, which would translate into adding about $2.5 trillion of new GDP this year - the rough equivalent of adding a new economy the size of France .
Innovations like Google and Facebook are obvious - less obvious is the innovation occurring in the developing markets. For example, GE Medical developed a portable EKG for the Chinese market that has proven to be so cost effective that it is now being exported to the US , and Kenyans can now use their cell phones as "wallets" to make electronic transactions - a technology that is just starting to roll-out in the United States .
Global talent is an asset class - businesses need to upgrade their human capital.
In the long run the greatest threat to the US is our deficits and rising entitlement spending for Medicare and Social Security.
Behavioral Finance - Mike Moody, Dorsey Wright Associates
Humans don't like psychological pain. As humans we are all emotional beings and are susceptible to behavioral traits that interfere with good investing - such as the illusion of superiority (we are all above average drivers), and the illusion of control (studies of craps players in Las Vegas have shown that players who need a high number throw the dice hard, and players who need a low number throw softly).
The path to investment success lies in psychological discomfort.
The leading cause of investor losses is investors trying to avoid having losses (I encourage you to think hard about this one).
When you are emotionally engaged as an investor you are at risk
Interest Rates, Bonds and Equities- Jeremey Siegel
Fund flows over the past twelve months have been predominately to fixed income investments but remember, the period from 1954 to 2009 was an anomaly, as interest rates went from 14% to 3.4%. The secular bull market in bonds is over.
US Treasuries are very expensive here - they will still act as "insurance" when stocks fall but at a very high price. Treasuries will be a terrible drag on long-term returns going forward.
Treasuries are pure duration risk and the duration tailwind is over - you can still get returns in bonds but bond outperformance will have to come from security selection, credit work, country selection etc.
Oil is the biggest macro economic risk factor in front of us - at $150--$200 a barrel we would have another recession.
There is no possibility of a US Treasury default, zero chance...the real default for Treasuries will be inflation
The US dollar will decline on a secular basis versus Emerging Market currencies - but may appreciate versus the Yen and Euro.
2-4% inflation is the sweet spot for equities as they are a claim on real assets and companies have some pricing power. Over 6% inflation would create problems for equity multiples.
Portfolio Design - Richard Marston
We may all need to invest differently going forward to reach our goals. In the past, bonds could help manage the risk of stocks. With today's low rates, they may not help as much.
Bonds have outperformed stocks since 2000 but the secular bull market in bonds is over . Don't get caught up in the crowd. In 1999, people were making fun of Warren Buffett.
Large growth stocks were up 33.2% (Russell 1000 Growth), In 2000, they were down (22.4%) and Large value stocks were up 7.0% (Russell 1000 Value). People stopped laughing.
Equity and real estate diversification do not help reduce risk much in a recession, but they look much better as the economy recovers.
Alternative investments (especially hedge funds) helped buffer portfolios through the downturn - but less than we thought they would, and we have learned that they are more illiquid then we thought.
The real art of asset allocation lies in rebalancing - and it is hard to do. Nobody wanted to sell their winners in 1999 and no one wanted to add to their equities at the height of market sell-offs in February and March of 2009.
Neither the deficits nor Japan will derail the economic recovery, but oil is the one wild card that could.
Miscellaneous
Big things happen more often then you expect - we need to be risk diversified, not just asset diversified - Tony Crescenzi
Fear still exists in the heart of many investors - Ron Insana
When looking at markets remember that GDP growth does not always translate into investment returns - Tony Crescenzi
10 of the 11 post-World War II recessions have been preceded by a sharp rise in oil prices - Marvin Zonis
The US has 765 automobiles per 1,000 citizens, Germany has 546, the UK 426, China 128, India 12 - Marvin Zonis
The US collects about 18.5% of GDP in taxes and US discretionary spending is about 12.5% of the total spending - the rest is Medicare, Social Security, defense and interest on the debt - Marvin Zonis
How confident are you that you have identified all of the significant risks in your portfolio?- Geoff Colvin
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