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Stocks, Bonds, Real Estate? Five Experts on Where to Invest for 2013

investing_optBY WARREN BOROSON
NEWJERSEYNEWSROOM.COM
BOROSON ON MONEY

The stock market (Standard & Poor’s 500) next year will:

Rise 8% in 2013 (Scott Noyes)

Can go dramatically in either direction (Jerry A. Miccolis)

Will go up at least 10% (Steven A. Kaye)

Possibility for downside, seems higher than possibility for upside (John N. Coumarianos)

“Markets will be continue to be volatile during the year but could end up by 5–6%.” (Kenneth B. Shapiro)

In short, once again the experts disagree.

Still, when we questioned a bunch of noted investors about how to prepare for 2013, just about everyone advised avoiding long-term bonds (because interest rates may go up). And just about everyone was optimistic about emerging markets. Still, one person recommended a portfolio of 65% stocks, 35% bonds; another recommended 35% stocks, 65% bonds. And there was disagreement about what might happen to real estate investment trusts.

Here are our Big Five experts:

Noyes, CFA, CFP, Noyes Capital Management, New Vernon

Miccolis, CFA, CFP, chief investment officer, Brinton Eaton, Madison

Kaye, CFP, CLU, ChFC, president, American Economic Planning Group, Warren

Coumarianos: Managing Member, Hamilton Research and Management, Northvale

Shapiro, CPA/PFS, CFP: Shapiro Financial Group, Hazlet

Next question:

What asset allocation would you recommend for 2013?

Noyes: “65% stocks, 35% bonds.”

Miccolis: “Include 10 to 20% allocation to alternatives — REITs (U.S. and emerging markets), timber, market neutral funds, etc. — with the funds coming disproportionately from bonds.”

Kaye: “75/25.”

Coumarianos: “My ideal simple portfolio is 60% FPA Crescent and 40% Doubleline Total Return. Crescent is holding more than 20% cash, and Doubleline Total Return is holding nearly 20% cash, so it winds up being a fairly atypical 60/40 stock/bond portfolio. Better opportunities than those that currently exist are likely to present themselves, so both managers of these funds, Steve Romick and Jeffrey Gundlach, are holding cash to try to capture them.”

Shapiro: “We remain comfortable with a 35% stocks/65% bonds allocation, with real estate investment trusts included in bond allocation.”

Which sectors might do poorly?

Noyes: “Financials.”

Shapiro: “Energy may continue to lag.”

Which sectors might do exceptionally well?

Noyes: “Biotech, software, emerging markets.”

Coumarianos: “When one runs Joel Greenblatt's screen for the 30 stocks with the best combination of high earnings yield and high returns on invested capital (www.magicformulainvesting.com) for companies with a market capitalization of $5 billion or greater, a fair amount of technology names appear. For example, Apple, Cisco, Dell, Intel, Microsoft, Oracle, Seagate Technology, and Western Digital. That makes it a decent bet that technology should do better than the overall market.”

Shapiro: “Real estate and medical.”

Do you have any favorite stocks or mutual funds?

Noyes: “POGRX – Primecap Odyssey Growth, FPA Crescent Fund – FPACX, Sequoia Fund - SEQUX.”

Miccolis: “Self-serving, but we like GDAIX for its explicit downside risk management.” (The fund is run by Brinton Eaton.)

Coumarianos: “FPA Crescent (FPCAX), Doubleline Total Return (DLTNX), PIMCO All Asset All Authority (for tax-advantaged accounts – PAUDX), Yacktman Focused (YAFFX), Royce Special Equity Multicap (RSEMX), Formula Investing U.S. Value Select (FNSAX).”

Shapiro: “Fidelity Real Estate Income, Fidelity New Markets Income, Primecap Odyssey Aggressive Growth.”

Any unfavorites?

Noyes: “Lots.”

Miccolis: “Any inverse or leveraged funds. Long-only VIX funds.” (VIX funds track the market’s volatility.)

Coumarianos: “Any long-term U.S. Treasury fund….It's difficult to predict what the stock market will do in one year, but the possibility for downside seems higher than the possibility for upside, given how little bonds are yielding and how expensively stocks are trading (Shiller P/E over 20).”

Shapiro: “No.”

Might emerging markets do exceptionally well?

Noyes: “Above-average returns.”

Kaye: “Yes.”

Coumarianos: “Emerging markets are, generally speaking, the cheapest stock markets in the world right now. It's difficult to predict if they will do well next year, but they are likely to return more than domestic stocks over the next full cycle (7-10 years).”

Shapiro: “Latin America and Asia should do well over time, probably outperforming the domestic economy over next 3-5 years.”

What about high dividend-paying stocks?

Noyes: “Strategy should continue to work but not outperform.”

Kaye: “Not as well as high-beta [volatile] stocks.”

Coumarianos: “Dividend-paying stocks may be roughly divided into two segments. The first is high-quality blue chips -- JNJ, Intel, ExxonMobil, Microsoft, etc. The second segment is junkier companies with lower returns on invested capital, like REITs and utilities. We're avoiding junkier companies now. They've all had big runs, and we think they're overpriced. We'd rather get 2% or 3% from some high-quality blue chips than 4% from poorer-quality companies like REITs or utilities. Investors should consider Vanguard Dividend Appreciation ETF (VIG).”

Shapiro: “We’re concerned right now about the impact on these stocks because of potential changes in tax law. Media news may cause some spike downward but should be muted due to percentage of stocks held in qualified portfolios not impacted by tax-policy adjustments.”

What about commodities – oil, gold, etc.?

Noyes: “They should do okay until interest rates rise.”

Miccolis: “Long-only commodities are no longer the diversifier to equities that they were pre-2008, so there is little reason to accept their high volatility.”

Kaye: “Good.”

Coumarianos: “Natural gas appears to be very cheap. There's some good reason for that, with all the new drilling/fracking going on, but it's unlikely to remain this cheap.”

Shapiro: “We’re underweighting energy due to the slow-growth economy, and we’re concerned about agriculture-related investments due to global recessionary trend. But we have some money allocated to Silver ETF (SLV) as an inflation play.”

Which part of the yield curve would you recommend? Short, intermediate, long?

Noyes: “Short.”

Miccolis: “Cheat toward the short end (why lock in today’s low long-term yields?) until interest rates back up to normal.”

Kaye: “Short.”

Coumarianos: “Short-intermediate.”

Shapiro: “Intermediate, with a duration approximating 4-5 years.”

What kinds of bonds would you prefer – high-yield, AAA, foreign, mixture…?

Noyes: “I like U.S. investment grade, GNMA, and foreign (non-Europe).”

Miccolis: “Highest quality, always. Mix of U.S. and emerging markets.”

Kaye: “A.”

Coumarianos: “Jeffrey Gundlach's mixture of Ginnie Maes and lower quality mortgages in Doubleline Total Return (DLTNX) is intriguing as preparation for inflation or deflation. Investors might just buy the fund.”

Shapiro: “A blended portfolio of GNMA, corporate investment grade, intermediate, lower-risk high yield, emerging market bonds, bank loan funds.”

Any other predictions?

Noyes: “A good year for real estate.”

Miccolis: “We will continue to be buffeted by exogenous political factors in U.S. and Eurozone, and the stock market can go dramatically in either direction. So the best approach is to be fully invested but with aggressive down-side risk management.”

Coumarianos: “Although investors could continue to collect dividends from REITs without suffering price declines if interest rates stay low, the stocks are generally expensive and have no margin of safety. Any spike in rates will send them tumbling. They're not worth the risk they carry at current prices, despite their dividend yield.”

Shapiro: “I expect the overall economy to remain weak for another 2-3 years. Equity markets may rise modestly as valuation multiples improve, but I remain cautious about spikes in volatility.”

*** *** *** 

To receive Boroson’s column regularly, drop him a note at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

 
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