By Randy Neumann
Last October, I traveled to Newport Beach, Calif., (where, by the way, a Mercedes is barely an acceptable car) to attend a due diligence meeting in the offices of Allianz Global Investors.
What is a due diligence meeting and who are Allianz Global Investors?
In my financial planning practice, I do not manage money, e.g., pick stocks, bonds and other securities for clients. Instead, I select money managers, such as Allianz Global Investors, to do that. A due diligence meeting is one in which you meet the managers and learn about the system they use to manage money.
A few years ago, Allianz Global Investors, a large international company based in Germany, bought PIMCO, a bond manager with $247,898 in millions in assets under management. Bill Gross, the longtime manager of the PIMCO Total Return Fund, the largest bond fund in the world, has been named the “Fixed Income Manager of the Year” three times.
In the trade, bond pickers are usually dour folks. Why? Stocks make money on good news, bonds make money on bad news, so it stands to reason that bond managers like bad news.
But Bill Gross brings misery to a subterranean level. His concept, “The New Normal,” can be described as making Armageddon look attractive.
In a nutshell, he believes that all the bad things that have been happening in the economy will continue to happen; i.e., we will never come out of the economic funk in which we currently find ourselves.
Here are a few of Gross’ comments: “China doesn’t need any carriers to do damage. All they need to do is cash in some of our bonds that they hold.” He continued, “If I were to sell a lot of bonds, that would put a lot of pressure on the economy.”
Needless to say, I didn’t leave that meeting as a happy camper.
A week later, I came back to the right coast, to Manhattan for a due diligence meeting at the offices of BlackRock, a large international money manager with $3.19 billion under management.
Bob Doll is a vice chairman and chief equity strategist at BlackRock. Since the 1990s, Doll has published a series of economic and market predictions at the beginning of each year. He is more often right than wrong, and, in 2007, he was 7 out of 10, for which he received media kudos.
These were his predictions for 2010:
1) U.S. equities experience high single-digit percentage total returns after the worst decade since the 1930s. Yes, folks, the S&P (a measure of the broad market) lost money over the past 10 years. This is the first time this has happened since the Great Depression. The silver lining is that 10 years of negative annual stock market returns has invariably produced attractive returns over the subsequent 10 years. Score one for Doll. Take one from Gross who sees nothing improving.
2) Recessions occur more frequently during this decade than only once a decade as occurred in the last 20 years; since 1910, three recessions at an average frequency of 3.8 years and since 1990, three recessions at an average frequency of every eight years (BlackRock Inc.). We’ll call this a tie as Gross agrees.
3) Health care, information technology and energy alternatives are leading growth areas for the United States. Gross, being a bond guy, did not have much to say about this.
4) The U.S. dollar continues to become less dominant as the decade progresses. Both would agree on this, with Gross being more didactic.
5) Interest rates move more irregularly higher in the developed world.
6) Country self-interest leads to more trade and political conflicts. Gross would agree on this.
7) An aging and declining population gives Europe some of Japan’s problems. Gross would agree.
8) World growth is led by emerging-market consumers. Gross would agree.
9) Emerging markets weighting in global indices rise significantly. Gross would agree on this also.
10) China’s economic and political ascent continues. Based on his carrier comment, Gross agrees.
Interestingly, one would not expect that a bull and a bear would agree on so much. However, the real difference between the two comes in the actions taken by each party.
For example, Doll’s tips for long-term investors were as follows:
• Overweighting stocks and other risk assets versus treasuries and cash. Gross sees the stock market continuing to be in a funk and would not put a nickel in it.
• Overweight U.S. stocks versus other developed market equities. Doll says, “Although we are predicting a slower growth environment in the United States marked by more frequent recessions, on a comparative basis, U.S. growth should still be stronger than that of other developed markets.”
• Focusing on opportunities in emerging markets.
• Allocating to better positioned sectors.
Who’s right and who’s wrong? It really doesn’t matter as long as they both continue to make money for their investors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial. Member FINRA/SIPC. He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.
