NEW YORK, Oct. 5, 2005 (PRIMEZONE) -- At a media conference held here last month, eight investment professionals discussed their investment expertise, reflected on the stock and bond markets, and addressed the current economic climate. Highlights from this event follow.
The conference was sponsored by Millennium Media Consulting, a financial media relations firm headquartered in Alexandria, Va. "We're pleased to be able to connect financial journalists with investment professionals who can discuss the newsworthy trends and themes of the asset management and securities arenas," says Scott C. Tanner, founder and president of Millennium Media Consulting.
Outlook for the Fixed-Income Market
"The one-two punch of Hurricanes Katrina and Rita probably won't have a long-term impact on the fixed-income markets, but there could be short-term ripples," said Margo Cook, CFA, Managing Director, and Head of Institutional Fixed-income at The Bank of New York, headquartered in Manhattan. "There's going to be an impact on the shorter term, but this isn't really changing our long-term predictions," she noted.
She predicts that over the longer term interest rates will stay low, in the 4% to 5% range, even as the Fed continues incrementally raising rates. "Greenspan wants to be known as the guy who kept inflation in check," Cook said. For the longer term, the fundamentals are in place for inflation to stay low, although rising home heating costs this winter could threaten that. Still, to the rest of the world even this modest rate is high and attractive, she added.
She believes that future demand for fixed-income products will be strong as investors who are growing older will rely more heavily on this asset class. In addition, pension plans with long-term liabilities want longer-term assets to meet those liabilities. "Even Katrina and Rita won't change those secular trends," Cook surmised.
Assessing the Economy, Selecting Sectors and Picking Stocks
Will the current economic scenario lead to a full blown recession? "Not likely," said J. Michael Barron of Knott Capital Management and portfolio manager of the Quaker Capital Opportunities Fund. "We believe the economy and interest rates will be the arbiter to investment outcomes," he said. "Right now the economy looks fantastic and will not lead us to a recession."
But Barron noted that there are a number of risks that have concerned him. These include higher inflation driven by soaring fuel costs, twin deficits, lackluster job growth numbers, and a lack of pricing power among companies who are watching the Consumer Price Index creep up and recognize they cannot pass their own rising costs onto consumers.
Knott Capital's investment process combines top down economic forecasts with specific sector analysis, and a bottom up stock selection methodology. Some sectors will have strong headwinds. "It's the sectors with tailwinds, or low hurdles that we want to overweight," Barron noted. He noted that one of his favorite stocks is Chesapeake Energy which has had success in drilling and has been on a fully-funded acquisition spree in which it has acquired both mom-and-pop operations as well as properties from Exxon Mobil and British Petroleum.
Hedge Funds are Definitely Being Challenged
"Right now the hedge fund industry is being challenged," said George Lucaci, Managing Director of HedgeFund.net, an affiliate of New York City-based Channel Capital Group, LLC. "In particular, convertible arbitrage funds which have been experiencing large losses have become the ugly sister, if not the pariah, of the hedge fund industry with lots having closed," he added. In addition, hedge funds are finding themselves unable to liquidate distressed securities, and mortgage hedge funds have not achieved the kinds of returns investors expected.
Many of the hedge fund managers who have mistakenly put their pedigrees before their strategies have come to realize that they need to work hard to showcase their unique talent, and not rely on their deep-pocketed father-in-law, he chastised. Moreover, once their funds reach $1 billion in assets, hedge fund managers need to learn to rely not on management fees, but on incentive fees generated through performance.
Lucaci cautioned would-be hedge fund investors to carefully perform their due diligence, read marketing materials with a critical eye and watch for red flags. These can include hedge funds that claim expertise in multiple disciplines or those with a sustained directional bias which can prove risky, those that release financial updates noting that an audit is in progress, and biographies of employees who attended, but never graduated, college.
Having Faith in Catholic Mutual Funds
"There's an opportunity for us to tap into about 1.2 million predominantly lay Catholic investors," enthused George P. Schwartz, CFA, president and Chief Executive Officer of Bloomfield Hills, Mi.-based Schwartz Investment Counsel, the manager of the $400 million, four-fund Ave Maria Mutual Funds group, the fastest growing Catholic mutual fund family. "We've only scratched the surface," he added.
The morally responsible funds were inspired by Tom Monaghan, the founder and former Chairman of Domino's Pizza, for whom Schwartz had managed private accounts. The funds invest according to the teachings of the Catholic Church and screen out companies with ties to abortion and pornography, those that make contributions to Planned Parenthood, and companies that offer their employees non-married benefits which, Schwartz believes, is counter to the sanctity of marriage.
The fund group distinguishes itself from socially responsible mutual funds in that it does not screen out companies with ties to alcohol, tobacco or firearms. "These are not core issues for the Catholic Church," Schwartz said. "We are not trying to be all things to all people." The fund retains a Catholic advisory board chaired by Bowie Kuhn, the former Commissioner of Major League Baseball.
The funds also invest according to a value investment style. "We like companies with temporary problems," Schwartz noted.
A Quantitative Approach to Uncovering Value
"There's been a renaissance to looking at attractive companies with improving fundamentals," said Andrew Janes, CFA, partner with Harris Investment Management, and portfolio manager of the $144 million Harris Insight Core Equity Fund. That is in stark contrast to the 1999-2000 market where stock stories, not companies' fundamentals, drove the market, he added.
The fund manager uses quantitative models that include factors such as price momentum, balance and income statement factors, dividend yield, sales growth and free cash flow, then ranks stocks based upon their returns. Then fundamental analysts further evaluate stocks to make sure the selections are in line with risk mandates.
"Energy stocks in general have hit some home runs, as has Apple Computer with its unique products," Janes said. "While most of the large pharmaceutical companies have brought problems on themselves, Johnson & Johnson has been a standout and Cardinal Health, which had some problems last year, has also done well."
Grabbing Returns via M&A Activity
"By no means are we seeing a slow down in merger and acquisition deal flow," said John Orrico, CFA, founder of Water Island Capital, based in Manhattan, and portfolio manager of The Arbitrage Fund, which invests under a merger arbitrage mandate. "Corporate coffers are flush with cash, and leveraged buyout firms want to put money to work."
"Right now we are seeing record levels of M&A deals in the U.S. and similar booms in Asia, Europe and, over the last 12 months, Australia," Orrico added. Could anything derail continued U.S. merger deals? "Yes. If interest rates rise too quickly and interrupt the economic expansion, that could interrupt deal flow," he predicted.
The five-year-old Arbitrage Fund utilizes a fundamental, bottom up approach to investing in shares of target companies once a deal is publicly announced. That allows the fund manager to capture the spread between the current price of the acquiree's stock and the price promised at the close of the deal.
But among the hundreds of publicly announced deals, Orrico cautions that not every merger is worth taking part in. The manager assesses the deal to be sure any anticipated return will be greater than the risk free rate of return on the investment. "Essentially, we determine whether a deal is worth it," he adds. "Our job is to understand the rationale behind those deals and be on the lookout for what could derail these deals." Such factors include difficulty obtaining shareholder or regulatory approval, or even financing problems for the acquirer.
Clueing Into Derivatives Activities
"Those who focus on (stock market) price action alone are missing half of the picture," counseled Warren West, founder and president of Greentree Brokerage Services, Inc., a Philadelphia-based broker/dealer that caters to institutional investors. "We look at the markets to help identify some momentum, but sixty percent of all equity transactions are directly related to derivatives transactions." West's firm evaluates activity in the derivatives market to provide early information and clues to emerging trends and news for his clients.
The old school approach was for analysts to watch insider activity; to see whether owners were buying or selling a stock, he said. Now, we're not seeing just simple sell transactions, but more sophisticated derivatives activity, such as buying a downside put or selling an upside put, to accomplish the same transaction but avoid regulatory reporting which would quickly tip off analysts.
But West said that he doesn't consider every transaction in the derivatives market to be a result of an investor's opinion. Instead, his firm ranks the derivatives activity to pinpoint sectors to more closely monitor. His firm also monitors the activity of convertible securities, futures and exchange traded funds for discernible patterns and opportunities.
Taking the Emotion Out of Investing
"Many managers end up really marrying the stocks they invest in," said G. Michael Mara, founder and president of Malvern, Pa.-based Valley Forge Capital Advisors, and manager of the Penn Street Fund Sector Rotational Portfolio which employs quantitative models. "We take the emotion out of investing." The modeling, developed by Mara and his team years ago to predict underperformance, but since adapted to a buy-and-hold strategy. It allows the fund to predict which sectors are rotating into favor. "You never could predict what particular style or what particular sector would lead the way," Mara noted. "We go where our stocks tell us to go."
The Penn Street Fund Sector Rotational Portfolio uses proprietarily developed quantitative models that equally incorporate value, growth and momentum factors. The process ranks 1,250 of the largest U.S. companies based on various valuation measures to identify, by pure count, those sectors which should be overweighted and which underweighted. Mara then fills those sector recommendations with stocks from among the top identified companies.
Mara, who began developing predictive models when he worked for the defense department, believes quantitative models can be very, very efficient, and can identify opportunities at times when the stock market is not efficient. "Right now the fund is significantly overweighted in the energy, industrial and communication services sectors," Mara added.
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.