A survival guide for managing investments

With the new year under way, pundits are issuing their forecasts of market returns for 2013 and beyond, while a number of big uncertainties loom on the horizon.
Will economic growth rise to its historical average? Will unemployment drop? Will the Eurozone get back on track? Will emerging economies decouple from the over-leveraged developed economies?
Meeting your goals requires adapting your asset-allocation strategy to counteract the changes in the financial and economic landscape.
Worldwide strategies better reflect today’s economic reality than the traditional division of assets into U.S. and non-U.S. categories.
A worldwide strategy will allow you to invest in the best companies regardless of where they are domiciled.
Many investors shy away from the international markets, particularly the emerging markets, out of fear or a lack of understanding the important role they can play in a portfolio. During the 1980s equity markets in developing countries were extremely small and illiquid and received relatively little interest from investors. However, over the next few decades, emerging equity markets experienced enormous growth and development.
The dramatic growth of emerging economies over the last decade has drawn the attention of investors worldwide. The International Monetary Fund recently projected a robust 6 percent growth rate of real GDP in emerging economies for 2013 compared with a modest projection of 2 percent for developed economies.
In parallel with the growth of emerging economies has been an exponential rise in the market value of emerging-markets equity offerings, resulting in a steady increase in emerging markets as a share of global equities.
Although emerging-market equities are commonly (and accurately) viewed as a source of high long-term growth, they also generate high income. The number of dividend-paying companies located outside the U.S. is even larger than the number in the U.S. In fact, emerging-market equities typically have higher dividend yields than U.S. equities. Yet emerging-markets equity still only accounts for about 14 percent of total global market capitalization by free float in the Russell Global Index. This percentage is surprisingly low given that emerging economies account for close to 50 percent of global GDP once exchange rates are adjusted for purchasing-power parity.
Don’t abandon dividend stocks. While certain segments of this style appear expensive (i.e., U.S. utilities), dividend stocks are still attractive. The dividend tax rate will stay at 15 percent (23.8 percent if you earn over $450,000). U.S. corporations have the wherewithal to raise dividend payouts to compensate investors for any change in tax treatment. Investors should look for companies that are cash-flow rich and have a track record of increasing payout rates.
Yields offered by traditional income vehicles for U.S. investors have fallen to historic lows – both on an absolute basis and relative to inflation. The initial income potential of a balanced portfolio combining bonds and equities isn’t much better. To compound the problem, a large portion of the U.S. investor base is aging and entering retirement, creating a greater need for cash flows from their portfolios. These factors are prompting many fixed-income investors to reassess the constraints they have traditionally placed on their bond positions and the role they play within their portfolio.
In this environment, yields on many traditional income vehicles have fallen to levels not seen since the 1950s. At current rates, most traditional fixed-income markets do not exceed the corrosive effects of inflation. In this environment, lower income streams from both core fixed-income and balanced portfolios suggest a greater dependence on principal return for both growth and cash-flow generation. Inevitably, investors must consider their new options: to lower their return and income expectations; incur greater principal risk; or seek to augment a portfolio’s income potential by reassessing their approach to fixed income. As a result, investors have begun to think about how to generate income from their fixed-income allocations by reassessing the fixed-income opportunity set. It requires the investor to be more active in their approach to bonds and realize each sector may have a certain shelf-life.
Just like with equities, you need to take a worldwide view in building your fixed-income portfolio. We find the international bonds markets, including the emerging-market debt sector, to be appealing at the current time. Outside the U.S., many regions and countries with better fiscal conditions have continued to issue debt with higher yields than the debt of their peers. In addition to international bonds, we believe the corporate bond sector, including high-yield debt, bank loans and investment-grade debt, continue to offer attractive returns.
While we never have an accurate crystal ball, we do know that changes in the financial landscape require new thinking in investment management. It is important to re-evaluate the way you manager your investment portfolio. You need to take a worldwide view and create a blend of sector exposure and strategies. Pursuing this new approach will help your portfolio navigate these volatile markets and uncertain times so you can achieve your financial goals. •


Matthew M. Neyland is the director of investments at SK Wealth Management in Providence.

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