NEW YORK, Jan. 19, 2005 (PRIMEZONE) -- At a media conference held here last month, seven investment professionals discussed what they expect the investment climate will be like in 2005 and discussed their individual investment strategies. The conference was sponsored by Millennium Media Consulting, Inc., a financial media relations firm headquartered in Alexandria, Va.
"We were encouraged that there continues to be a strong appetite for these press briefings where journalists can listen to a variety of investment professionals talk about the markets, their respective strategies, and the themes and trends that investors should be watching this year," says Scott Tanner, founder and president of Millennium Media Consulting.
Highlights from this event follow.
Interest Rates Inching Higher -- Good News for Long-term Bond Market
We will likely see interest rates creep up this year with the Fed Fund's rate approaching 3-1/4% to 3-1/2% by year-end 2005 and 10-year Treasury rates in the 5% to 5/14% range, said Margo Cook, CFA, Senior Vice President and Head of Institutional Fixed Income with BNY Asset Management, a division of The Bank of New York. People think interest rates are going up because rates have been so low, but rates don't have to go up, especially if inflation stays low, she said. "We are excited to see interest rates rise because it gives a better total return on the bond market. It is actually good for bond investments over the long term," she added.
There are still positive returns to be had in the investment grade and high yield bond sectors, but returns will not be as high as in 2004. "I think credit spreads could widen out a bit in 2005 and the credit market may be in for a bit of a challenge," Cook predicted.
The Hedge Fund Industry: Squarely on Radar and Ready to Register
Hedge fund interest is on the rise and more and more foundations and endowments are adding hedge fund investments, just as the SEC is preparing to register hedge funds with assets of more than $25 million by February 2006, said George Lucaci, Managing Director of Manhattan-based Channel Capital Group Inc. and HedgeFund.net, the proprietor of the world's largest database of hedge fund information. The irony there is that most of the fraud and other blowups have occurred in hedge funds with less than $25 million in assets, he said. The two most common underlying themes in hedge fund schemes have been managers falsifying their education and not having an institutional background, he added.
Hedge funds are now going mainstream and new benchmark standards are being developed. The industry is also seeing increasing interest from investors in Europe and Asia, Lucaci noted. Domestically, The Bank of New York's purchase of Ivy Funds and J.P. Morgan's acquisition of Highbridge Capital Management are just the tip of the consolidation wave, he predicted.
Finding Energizing Opportunities in the "SMID" Cap
The energy sector could be the place to be this year, predicted Lester Rich, CFA, a Founder and Managing Partner at StoneRidge Investment Partners, based in Malvern, PA. "Energy is a hot topic today, as we have seen inventories of heating oil and crude oil building," he added. When oil hit $50 per barrel, we pulled back a bit and underweighted the energy sector. But oil should still be in the $35 to $45 a barrel range throughout 2005, with OPEC exerting pressure to reign in oil production to keep prices lofty, he added.
In 2003 StoneRidge formalized its proprietary SMID investment strategy and now manages $50 million in SMID assets. The "SMID" category was created as a hybrid higher-end small-cap investment strategy, Rich explained. "We saw lots of small-cap managers having to close their small cap portfolios because their asset sizes became too large. As their assets grew they found they needed to move up the capitalization spectrum in order to find stocks to buy." They were becoming margin SMID investors," he quipped. Moreover, the "SMID" (small-to mid-cap) sector which Rich defined as companies with capitalizations between $500 million and $7 billion, will offer some opportunities. "We increasingly heard from consultants and clients that there was an actual interest in a stated SMID mandate," says Rich. "They wanted market capitalizations above what would normally be considered small cap but still have some play in the small cap area, so we looked at an opportunity to fill that niche while still keeping our small-cap mandates intact."
Building Models to Determine Hot Sectors
"In the past we have had not one holding in this area, but now, utilities is our hot sector," said Mike Mara, Founder and Controlling Shareholder of Valley Forge Capital Advisors and Manager of the Penn Street Fund Sector Rotational Portfolio (PRSPX) in Valley Forge, Pa. The fund utilizes a proprietary quantitative model which incorporates momentum, value and growth factors to determine which market sectors to overweight. "Lots of risk lies in the emotion of the investment manager," Mara counseled. "Using a quant model takes the emotion out of investing. You need to have a process and a discipline and remember that exceptions don't work." Mara cut his teeth building computer models to help the military predict future events.
His firm's investment model ranks the top1,250 stocks. Mara then takes the top 125 ranked stocks to see which of the 11 sectors of the S&P they fall within. (The S&P now has 10 but his fund breaks out transportation.) Sectors can then be over- and under-weighted accordingly. Throughout last year, the energy sector was the most overweighted sector, but by the end of 2004, the communications and basic materials sectors had rotated into favor, Mara said.
The Real Estate Sector: Still Burning Brightly in 2005
"Real Estate Investment Trusts (REITs) have been one of the hottest sectors in 2003 and 2004, and can lead again in 2005," said Robert Promisel, Principal and Vice President of Berkeley, Ca.-based Adelante Capital Management and with an office in Manhattan, where Mr. Promisel is based. "We think that the total return for REITs for 2005 will be in the high single-digit range," he predicted. Promisel explained that those returns will be driven in large part by income return, as REITs are required to pay the majority of their income out in dividends to avoid paying corporate income taxes. "REITs will pay dividends in the 5% range, and we will see some modest accelerated earnings growth this year."
Promisel noted that while occupancy rates are stabilizing and operating margins will expand so that REITs can grow, REITs will see some increased costs this year, including insurance costs that cannot be passed along to renters. "Despite these challenges, we believe REITs are a very effective way to add real estate to a portfolio and the additional diversification can reduce overall risk."
For a Hot International Market, Look Down Under
"We are a big believer in Australia," said Rajiv Jain, international equities portfolio manager with Vontobel Asset Management in New York City. "The country has a stable economic system and its publicly traded firms sport good corporate governance, high dividend pay outs and predictable earnings growth." Jain's investment style includes searching for high quality, predictable businesses that have delivered double-digit returns and can be purchased at reasonable prices. His investment process entails looking at the underpinnings of a company as opposed to taking a more macro view of a region. "One of the easiest ways to lose money is to bet on GDP growth," he explained.
Jain also noted that he is finding values in South Korea where a plethora of companies are currently selling at reasonable prices as compared to their earnings. As for Japan, he noted that he hasn't found much to buy there beyond Toyota, which has a $140 billion market cap and a big R&D budget. If oil prices stay lofty, the company will benefit because it is moving into selling hybrid cars. "Overall, prices in Japan are still expensive," he said. He is also cautiously optimistic about Latin American companies. "You can count on things going wrong there every few years," he quipped.
A Former Astrophysicist Spots Investment Trends
"It's sometimes easier to launch a satellite than pick a good mutual fund because there are so many variables that you can't predict," said Thomas Laming, founder, President and Chief Investment Officer of TrendStar Advisors in Overland Park, Kan. and sub-advisor to the Quaker Small Cap Trend Fund. Laming's engineering and aeronautics background had him working on spacecraft design earlier in his career. Laming noted that his firm uses three criteria to predict future long-term investment trends: 1) Is a trend definable and measurable? 2) Is the trend sustainable?, 3) Is it predictable? Based upon those factors, his firm chooses securities that can provide above average opportunities for growth over the next three to five years.
His firm also factors in bigger picture demographic and technology trends to see where investment opportunities may exist to capitalize on those trends. "This process provides the firm with a unique universe of 300 to 400 companies and a list of 18 or 19 trends," Laming said. We try to look for things that will give us an edge and the probability of being right, he said. For example, Laming cited Arbitron's deployment of the novel "portable people meter" which is to radio what Nielsen's TV viewer ratings are to TV. The people meter is a diary capable of registering what radio stations people listen to. It can log 37 million entries, then sends listener logs electronically into Arbitron's computer. The information is then used to set advertising rates for radio stations, he explained.
To obtain more information about any of the mutual funds or companies noted above, or to speak with any of these investment professionals, or learn how your company can take part in a future Millennium Media Consulting media conference, please contact: Scott Tanner at Millennium Media Consulting, office toll-free 866-755-FUND / or 703.519.1922 / cell: 703.627.2417 / e-mail: millenniummedia@msn.com, or SCTanner33@aol.com.