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PB Business Group brings in investment interpreters for wealth management forum

By Dian Vujovich
Special to the Daily News

The risk, reward and volatility in choosing among investments often can feel like a roller-coaster ride.

But presenters for the Palm Beach Business Group's recent Wealth Management Forum offered some insight on the opportunities and outlooks in large-cap stocks, municipal and fixed-income bonds, emerging markets and private equity.

The forum's panel of investment experts included Sandra Fuentes, vice president at BMO Private Bank; Roger Groebli, CEO of Reyl Overseas Ltd.; Stacy Solomon, fixed-income portfolio manager at JP Morgan Private Bank; and Bloomberg News reporter Jason Kelly, author of The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything.

Large-cap equities

"Despite a very dysfunctional Congress," Fuentes said, "despite the fiscal cliff that we have been talking about so often and the plunge that we are going to take over the fiscal cliff, despite the sequestration that took effect on March 1, despite all of this negative gloom and doom, the equity markets have continued to rally, catching many investors basically flatfooted."

Acknowledging that all three major indices had either reached or were neared all-time highs, she said Federal Reserve Chairman Ben Bernanke's "accommodating monetary policy" had created the current historically low interest rate environment that "prodded investors into the equity market."

Expecting modest 2013 economic growth, BMO doesn't anticipate that this year's returns will match those of 2012, Fuentes said, but the firm sees continued opportunity in the large-cap arena. Overall, BMO favors large-cap over small-company stocks, and value over growth; it sees opportunities in American and multinational companies, she said.

More specifically, BMO's analysts like financial stocks -- banks in particular, consumer cyclical and autos. She said the firm is underweighted in industrials and that tech stocks took a hit thanks to Apple's recent price decline, from more than $700 a share to $430.

"At BMO we abide by a philosophy that, at the end of the day, fundamentals do matter," Fuentes said. "And a company must have a positive outlook and support strong earnings."

When does BMO sell a holding? If something changes within the company and there has been a "fundamental change," Fuentes said, or when the company reaches its target price. BMO's investing approach has no emotional bias or sentimental attachment to a holding, she said, so once a stock reaches its target, it's time to sell and rebalance the portfolio.

Emerging markets

Large-cap stocks play a large part in core portfolios at Reyl because of the diversification in mature markets they offer. But "to spice up the core portfolo and fuel investment growth," Groebli said, the firm also will invest in the emerging-market, commodities and structural-investment products.

There's a big difference in what Reyl and BMO consider to be a large-cap company. "Large-cap doesn't mean $10 billion or $20 billion. It could be $1 billion," Groebli said.

Liquidity is important so a stock can be sold when an investor chooses to exit any holdings.

Groebli also works within a low-interest-rate environment, and one in which pension funds, institutions and some individuals demand returns of 4 to 5 percent. Getting that return is where investing in emerging markets can come into play.

Groebli said he currently sees opportunities in the Philippines, Indonesia, parts of Africa and China. "China has the tools to control their economy, their currency is under control. And (China has) the power to steer domestic consumption."

He said some Asian REITs (real estate investment trusts) had been a good source of income for retirees recently. They include REITS invested in hospitals and housing for the elderly. "REITs in Singapore return about 5 to 7 percent, and in Hong Kong between 8 and 9 percent per year."

Even though investing in the emerging markets carries risk, Groebli said, there is always a swing between "hope and caution." But if a country has a growing middle class as well as a stable currency and political environment, those risks can be minimized, he said.

Municipal bonds

Thanks to the current low-interest-rate environment, today's municipal bonds aren't like your father's, Solomon said, and don't add "a whole lot of value" to a portfolio.

Over the last 30-40, years interest rates in the United States generally have fallen, she said. "So investing in fixed-income has been a very nice place to get consistent yield with very little volatility."

Now that's all changed, and munis -- even the triple-A rated and insured ones -- carry interest rate risks. Even so, Solomon said, there's still a place for municipal bonds in portfolios -- just "not as large a piece as they might have had in the past."

To further reduce interest rate risk, she said, JP Morgan is "making sure that the maturity structure of these portfolios aren't as long."

JP Morgan expects rates to remain low for some time primarily because of the Fed's actions and the unemployment rate. "While the fed wants to remain accommodative in the U.S., keep inflation below 2.5 percent and see unemployment below 6.5 percent ... we think it's going to take some time (for unemployment) to get there," she said.

So what's a fixed-income investor to do?

One of JPMorgan's themes going forward is focused on absolute return fixed-income funds. Unlike traditional bond fund portfolios, absolute return fund managers aren't wedded to a particular investment style or benchmark. They may invest anywhere across the fixed-income spectrum.

Absolute return fund managers typically have a "cash-plus " goal that gives them leeway to cross all kinds of borders as well as fixed-income choices.

If this sector is new to you, you're not alone, Solomon said. "Five years ago there were 40 managers around who called themselves absolute-return managers. Today there is 140."

Private equity

Kelly began his presentation by asking if anyone in the audience had ever been to a Dunkin' Donuts shop -- and that if so, they'd had a private equity experience.

As an industry, Kelly said, private equity encompasses about $3 trillion in assets under management globally. And it's been estimated that 8 percent of U.S. gross domestic product is somehow tied to private equity.

The impetus for Kelly's book happened while on vacation in California, when his 8-year old son wanted to go to Legoland. Once they walked through the park's entrance gates, Kelly remembered that Legoland was owned by Blackstone, a private-equity firm. Then he realized that he and his family were staying at a Homewood Suites, owned by Hilton -- and hence owned by Blackstone. The car the family rented was from Hertz -- owned by Carlyle.

Kelly began keeping track of where his family went during this holiday, including what stations they watched on TV and where they ate. "I began to understand about how deeply entrenched in our lives private equity is," the first-time author said. And then he thought what might be more interesting is where private equity money comes from: Public and private pension funds.

Private equity began, decades ago, as a place known for leveraged buyouts and bootstrapping -- where risks were aggressively taken and handsome rewards expected. But things changed.

"In the past 10 years, private equity has evolved as an asset class that more and more people can get some exposure to," Kelly said. "And not just through their pension funds but through a lot of different avenues." One example: A mutual fund type of structure.

Private equity opportunities aren't likely to disappear soon, Kelly said, particularly when the pitch for investing in them is a promise of juicy returns.

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