And with the U.S. Federal Reserve at or near the end of its rate-cutting cycle, interest rates will likely rise, adding another challenge for stocks.
Jayusia and Alan Bernstein, founders of Miami-based Stratigraphic Asset Management Co., expect equities to enjoy 10 percent returns this year but are skeptical such gains will be sustained. They say the one lesson to be gleaned from recent years is that investors should lower expectations to realistic levels.
The Bernsteins manage more than $100 million in assets, with a minimum account size of $500,000. They expect corporate earnings will recover this year, but not enough to match profits seen in 2000. They see bonds as unattractive, given low yields that don’t compensate investors for the pricing risk if interest rates rise.
“The bullish story this year is that investor expectations are inflated, a recovery in the economy is anticipated, and low interest rates are making investors more willing to move up the risk curve into common stocks,” the couple wrote in a recent letter to clients. “Over the next few years it is not reasonable to expect the market to sustain double-digit returns because stock valuations are already high and corporate profits are problematic.”
Jayusia Bernstein says part of the problem during the Internet stock bubble was that “money managers, in order to keep up with the indexes, were buying companies with price/earnings multiples that didn’t make any sense.”
The Peruvian-born Ms. Bernstein takes a traditional approach to investing, with a portfolio of large-cap stocks, investment grade bonds, and no derivatives. She believes annual returns of 7 to 9 percent over the next three to five years are as much as investors should shoot for.
Ms. Bernstein says investors should study benchmarks like price/earnings ratios before buying stocks, and cautions against any attempts at market timing.
“Investing is counterintuitive. When you are most pessimistic is when you have to be buying, and when you are the most optimistic, you have to pull back,” she says, adding that most investors should buy regularly to average their costs.
Among the stocks the Bernsteins like are health insurance firm Cigna (NYSE: CI), life insurance company MetLife (NYSE: MET), and utility Duke Energy (NYSE: DUK), all for their attractive price/earnings ratios. The pair expect property casualty insurance firm Chubb (NYSE: CB) to reverse its recent slump as insurance premiums rise because of heightened terrorism concerns.
Among banks, the Bernsteins like Wells Fargo (NYSE: WFC) for its price and excellent management; they also like medical device maker Boston Scientific (NYSE: BSX).
First Pacific Advisors’ Robert Rodriguez was named Morningstar’s Fixed Income Mutual Fund Manager of the Year for 2001 after his FPA New Income Fund chalked up gains of 12 percent.
Mr. Rodriguez also manages the FPA Capital Fund, which soared 38 percent last year. He buys government, agency, and high-yield bonds and seeks out stocks that are “out of favor, unloved, hated, and selling at large discounts,” he says.
Mr. Rodriguez predicts tougher times ahead.
“This is not a period where people are going to see big double- digit investment returns like those of the 1990s. That era is probably gone for at least a generation,” Mr. Rodriguez observes. “Investors need to lower their expectations.
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