NEW YORK-While BlackBerries buzzed with news of Alan Greenspan's warning of a "possible recession" and the worldwide chain-reaction sell-off triggered by the dip in Chinese markets, a panel of mutual fund managers here last Tuesday pitched products to protect investors against an economic slump.
"Make no mistake about it. The U.S. economy is in a slow, grinding deceleration," said Hugh Moore, a partner with Guertie Advisors in Greenville, S.C.
But the American investing public continues to ignore the signs, he said. Moore cited the persistent popularity of exotic mortgage products, the inflated value of real estate, continued consumer confidence and general investor complacency as proof that investors aren't prepared.
"One or more [of the above listed] will reach its tipping point and hasten the economic slowdown already underway," he said.
While the U.S. economy will likely continue to grow, equity markets are unlikely to return to recent performance levels for at least a decade, according to Adrian Cronje, director of asset allocation at Wilmington Trust, who spoke at a separate presentation Tuesday evening.
"When it comes to the outlook for 2007 and beyond," Cronje said, "perhaps the only thing we have to fear is a lack of fear." Those who don't start preparing now for the impending economic shift will be hurt later, experts said.
This is especially important for those entering or nearing retirement, who should no longer expect annual gains of 15% or more, Moore said. Named for the sentry's post in a castle turret, the Guerite Absolute Return Fund helps investors guard against a down market by holding value-oriented mutual and exchange-traded funds during volatile periods. Moore gauges such periods using his Guerite Indicator, which tracks six elements, including the Treasury yield curve, residential fixed investments vis-a-vis the gross domestic product, and leading indicators from the Conference Board.
Moore encourages investors to choose reliable, although often slightly lower returns, over hot gains, for example 8.5% for four years, compared to three years of 20% gains followed by one 20% drop, noting that through the magic of compounding, slow-and-steady typically wins the race.
Baby Boomers seek not only reduced risk, but reliable income, too. "You have to be where other people aren't," said Don Shute, research analyst for the $85 million IMS Capital Management Strategic Income Fund in Portland, Ore. For Shute, that means moving beyond traditional bonds and transcending sectors. The bond market had a strong 20-year run, but that is coming to an end. "Instead of limiting myself to one or two segments of the income market, I use as many as I can," Shute said.
The fund's "toolbox" includes not only various types of domestic and international bonds and stocks, but real estate investment trusts (REITs), adjustable rate credit funds, floating rate bank funds, business development companies, inverse bond funds and various cash equivalents.
In the past year, the IMS Strategic Fund has returned 17%, compared to 4.4% for the Merrill Lynch U.S. Corporate Master Index, which tracks U.S. dollar-denominated investment grade corporate bonds. In 2005, the IMS fund lagged that index by 90 basis points, returning 1.1% compared to 2.0%, but beat the Merrill index in both 2004 and 2003 by 3.1% and 4.8%, respectively.
Perhaps more importantly for Boomers is its annual dividend of between 6% and 6.5%.
Boomers are also bound to give a boost to biotech, according to Stephen Patten, of Montreal-based Sectoral Asset Management, and sub-advisor to the Quaker Biotech Health-Care Pharma Fund. Biotech stocks today are the best bargain they've been in a decade, he said. Unlike chemical pharmaceuticals, which can be more easily copied and for which patents expire more quickly, biotech products provide sustainable revenue to their parent companies. Furthermore, whereas 10 years ago, only 10% of new drugs approved by federal authorities were biotech, today half of all drug sales are biotech.
And the demand for drugs is growing. The fastest-growing segment of the population is those over 85. The second fastest-growing group is those over 65. Add to that the fact that, on average, those over 65 take 18 prescriptions per year, while those over 75 rely on 23 prescriptions annually.
Biotech is not risk-free, though. Because only one in every 5,000 biotech products ever get to market, the Quaker fund has a highly disciplined approach, with a portfolio containing only 20 to 24 securities. At times when there is a dearth of promising products and companies to invest in, Quaker moves assets into cash.
For investors, cash is a common choice of safe harbor during volatile markets, but it's no long-term solution in an environment where the U.S. dollar continues to be devalued, said Axel Merk.
The manager of the Merk Hard Currency Fund in Portland, Maine, Merk pointed to the national debt, accruing at a rate of $2 billion per day, a growing credit bubble among consumers and a tendency among Americans to over-leverage their bets as signs that the dollar might not be so safe. On the other hand, investing in strengthening foreign currencies can help investors hedge against inflation, he said.
The Merk Hard Currency fund, which is currently heavily weighted in Euros, selects currencies from countries with sound economic policies, he said. Echoing fellow panelists, Merk expressed a pessimistic outlook for the U.S. economy in upcoming years, noting comments that the Federal Reserve is hoping for a slow and gradual decline in the markets.
"I get concerned when central bankers revert to hopes and prayers," he said. "That's not their core competency."
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