Is the Rally Over?
by Jane J. Kim
For those investors wondering whether the months-long stock-market rally, after retreating a few steps, has more room left to run, Mark Rylance has some words of advice.
"There's absolutely no way that anyone knows what's going to happen," says the Newport Beach, Calif., financial adviser.
Many investors are wondering whether they should cash out or stay invested. For their part, many financial advisers say they are keeping their clients in diversified portfolios but are making more tactical shifts.
Over the past year, for example, Mr. Rylance has increased the amount of dividend-paying stocks, master limited partnerships and blue-chip stocks to about 25% of clients' total portfolios from about 20% as a way to generate income in an otherwise lackluster yield environment. Now, he's looking at taking some profits given his concerns that the market is "probably overbought."
Many advisers are shifting into alternative assets, such as mutual funds that employ hedge-fund-like strategies to reduce risk and provide steady returns—all with lower correlations to stocks and bonds.
Early in 2009, Jerry Verseput, an adviser in El Dorado, Calif., started putting his clients into managed-futures funds, such as the Equinox Mutual Hedge Fund (MHFAX - News), and energy master limited partnerships, such as the Steel Path MLP Select Fund (EVBLX - News). "Over a five- to 10-year time frame, the equity classes have been correlating more and more," he says of standard-issue stocks and bonds.
For his high-net-worth clients, he has been using "secured income" funds that generate returns by owning income-producing assets, such as privately-held mortgages that are bought at steep discounts. Although investors typically have to lock up their money for at least a year, the funds can generate more-predictable returns.
Other advisers are paring back their clients' stock positions as they hit their investment targets. In recent months, Martha Schilling, an adviser in Drescher, Pa., has been taking profits and investing across other assets such as dividend-paying stocks and exchange-traded funds, closed-end funds, master limited partnerships and real-estate investment trusts.
"They have growth potential, but they also pay you while you wait for the appreciation," says Ms. Schilling, who looks for investments that pay at least 3% to keep up with the historical inflation rate.
Others are outsourcing stock picking to so-called flexible funds, whose managers have the flexibility to move in and out of assets to sidestep market losses. Jody Team, a financial adviser in Abilene, Texas, uses several funds that either employ hedge-fund-like strategies, such as the Hussman Strategic Growth Fund (HSGFX - News), the Hussman Strategic Total Return Fund (HSTRX - News) and the Arbitrage Fund (ARBNX - News), or funds that tend to be more opportunistic, such as the Leuthold Asset Allocation Fund (LAALX - News), as a way to build portfolios that have low correlations to the overall stock market.
Mr. Team is also looking at adding the Pimco Fundamental Advantage Total Return Fund (PFATX - News). About 40% of his clients' portfolios are in such funds, he says, with the rest of their assets evenly split between those that should do well in an inflationary environment, such as gold, energy trusts and Treasury Inflation Protected Securities, or TIPS, and those that should protect clients in a deflationary scenario, such as cash and longer-term Treasurys, such as the Vanguard Extended Duration Treasury Index exchange-traded fund (EDV - News). "Our strategy," says Mr. Team, "is to find true diversification again."
Meanwhile, Femi Shote, an adviser in McLean, Va., has recently been getting out of municipal and government bonds and moving into sectors that are poised to make money, such as the banking sector. "The banking sector has not participated in the recent rally and some may resume paying dividends in the near future," he says. "To take cash out of the market right now is crazy."
Write to Jane J. Kim at jane.kim@wsj.com
For those investors wondering whether the months-long stock-market rally, after retreating a few steps, has more room left to run, Mark Rylance has some words of advice.
"There's absolutely no way that anyone knows what's going to happen," says the Newport Beach, Calif., financial adviser.
Many investors are wondering whether they should cash out or stay invested. For their part, many financial advisers say they are keeping their clients in diversified portfolios but are making more tactical shifts.
Over the past year, for example, Mr. Rylance has increased the amount of dividend-paying stocks, master limited partnerships and blue-chip stocks to about 25% of clients' total portfolios from about 20% as a way to generate income in an otherwise lackluster yield environment. Now, he's looking at taking some profits given his concerns that the market is "probably overbought."
Many advisers are shifting into alternative assets, such as mutual funds that employ hedge-fund-like strategies to reduce risk and provide steady returns—all with lower correlations to stocks and bonds.
Early in 2009, Jerry Verseput, an adviser in El Dorado, Calif., started putting his clients into managed-futures funds, such as the Equinox Mutual Hedge Fund (MHFAX - News), and energy master limited partnerships, such as the Steel Path MLP Select Fund (EVBLX - News). "Over a five- to 10-year time frame, the equity classes have been correlating more and more," he says of standard-issue stocks and bonds.
For his high-net-worth clients, he has been using "secured income" funds that generate returns by owning income-producing assets, such as privately-held mortgages that are bought at steep discounts. Although investors typically have to lock up their money for at least a year, the funds can generate more-predictable returns.
Other advisers are paring back their clients' stock positions as they hit their investment targets. In recent months, Martha Schilling, an adviser in Drescher, Pa., has been taking profits and investing across other assets such as dividend-paying stocks and exchange-traded funds, closed-end funds, master limited partnerships and real-estate investment trusts.
"They have growth potential, but they also pay you while you wait for the appreciation," says Ms. Schilling, who looks for investments that pay at least 3% to keep up with the historical inflation rate.
Others are outsourcing stock picking to so-called flexible funds, whose managers have the flexibility to move in and out of assets to sidestep market losses. Jody Team, a financial adviser in Abilene, Texas, uses several funds that either employ hedge-fund-like strategies, such as the Hussman Strategic Growth Fund (HSGFX - News), the Hussman Strategic Total Return Fund (HSTRX - News) and the Arbitrage Fund (ARBNX - News), or funds that tend to be more opportunistic, such as the Leuthold Asset Allocation Fund (LAALX - News), as a way to build portfolios that have low correlations to the overall stock market.
Mr. Team is also looking at adding the Pimco Fundamental Advantage Total Return Fund (PFATX - News). About 40% of his clients' portfolios are in such funds, he says, with the rest of their assets evenly split between those that should do well in an inflationary environment, such as gold, energy trusts and Treasury Inflation Protected Securities, or TIPS, and those that should protect clients in a deflationary scenario, such as cash and longer-term Treasurys, such as the Vanguard Extended Duration Treasury Index exchange-traded fund (EDV - News). "Our strategy," says Mr. Team, "is to find true diversification again."
Meanwhile, Femi Shote, an adviser in McLean, Va., has recently been getting out of municipal and government bonds and moving into sectors that are poised to make money, such as the banking sector. "The banking sector has not participated in the recent rally and some may resume paying dividends in the near future," he says. "To take cash out of the market right now is crazy."
Write to Jane J. Kim at jane.kim@wsj.com
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