Where to invest? Pros also uncertain

If you are agonizing over where to invest your money, you aren't alone.

The pros are there with you — nervous about stocks and bonds as clear opportunities become fuzzy in both. As the best and brightest fund managers talked at Morningstar's three-day conference in Chicago last week, they repeatedly expressed reservations.

They see Treasury bonds vulnerable to the inevitable climb of interest rates, and corporate and high-yield bonds paying so little interest that there isn't enough insulation to protect investors if the economy suddenly weakens or if investors get cold feet. After the unrelenting climb of stocks since 2009, the pros see a stock market so pricey that stocks appear vulnerable to any bad news for the economy or companies.

But the difference between you and professionals who run mutual funds is that fund managers are hired to do something with clients' money, no matter what. While sitting on cash rather than stocks or bonds might provide security in an iffy environment, cash earns no interest, thanks to a Federal Reserve policy designed to get people to choose riskier options. Even though many pros say they are flummoxed by a market in which everything from stocks and bonds to currencies and commodities have all become pricey because of the trillions of dollars' worth of stimulus poured into the markets by the Federal Reserve and counterparts in Europe and Japan, fund managers are doing what they think they must: deploying money where they can make a case for satisfactory results even though they expect high prices to hold back future gains.

They are emboldened by the fact that prices are high — but not outrageously high.

After all, even though pros have worried about bonds and expensive stocks for months, the Standard & Poor's 500 stock market index has managed to bestow gains of 5.5 percent this year while bonds haven't incurred the losses that pros thought were a sure thing earlier this year. There hasn't even been a correction (a short-term downturn of 10 percent in the stock market) for 32 months. Such a long stretch without a sizable dip in the markets has happened only four other times, according to Gluskin Sheff economist David Rosenberg.

Still, bond fund managers Mark Egan, of Scout Investments, and Bill Eigen, of JPMorgan Asset Management, told a Morningstar audience of financial advisers that they are so concerned about the lack of opportunity in bonds that they have parked about 60 percent of their clients' money temporarily in cash. Pimco's Mohit Mittal has about 28 percent of his portfolio in cash.

Cash will hold back bond fund gains if bonds continue to do well. But Eigen figures interest rates will eventually rise, investors will panic and try to bail out of bonds so quickly that bonds will suffer sharp losses. Then he plans to buy bargains.

Fund managers typically avoid holding more than 5 percent cash because waiting for deals can take longer than expected, and investors get impatient when their mutual funds are earning less than other more daring funds.

Considering the high prices of stocks, some fund managers who specialize in stocks also are holding substantially more cash than usual. Even those scouring the world for investments are having difficulty finding stocks cheap enough to buy.

While some have suggested buying cheaper stocks in European markets, Ben Inker, director of asset allocation for GMO, is cautious about Europe.

"You can find some cheap companies, but all of them have hair on them," he told the Morningstar audience of over 1,000 financial advisers. "Some places that aren't even cheap have hair on them."

Since money managers must find something to buy, Treasury bonds that mature in five to seven years "are not a wonderful place to be, but are OK," he said.

Meanwhile, Dennis Stattman, who heads BlackRock's asset allocation team, said stocks of large Japanese companies that sell to the world are significantly cheaper than U.S. companies. He's trimmed some exposure to U.S. stocks because they've become so pricey and added Japanese companies.

European stocks have climbed significantly simply because the "European Central Bank took off the table the fear of banks failing," Stattman said. But "governments have promised too much and taxed too little."

Meanwhile, Michael Hasenstab, chief investment officer for Franklin Templeton global bonds, says two of his favorite markets for bonds have been Poland and Hungary, and he's comforted that the continuation of stimulus from the U.S. Federal Reserve and counterparts in Europe, Japan and China will power many emerging markets.

Gail MarksJarvis is a personal finance columnist for the Chicago Tribune. Email her at gmarksjarvis@tribune.com.


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