NEW YORK, Dec. 29, 2005 (PRIMEZONE) -- At a media conference held here earlier this month, seven investment professionals provided a year-end wrap up of 2005's markets and economy and predicted what lies ahead for 2006.
The conference was sponsored by Millennium Media Consulting, a media relations firm based in Alexandria, Va. "At these media briefings, financial journalists expect to hear expert commentary on the hot topics in the world of finance and investment management," said Scott C. Tanner, Millennium's founder and president. "In that regard, I think this was one of the best groups of speakers we've assembled."
Highlights from this event follow.
Stock Market Optimism, Economic Concerns
"I am generally positive about the stock market over the long run. The stock market is still an attractive place to invest in the U.S.," said the legendary Roger Ibbotson, Ph.D., Chairman and Founder of Chicago-based Ibbotson Associates and Professor of Finance at the Yale School of Management. "While the stock market has historically returned an average of 10.4% per year between 1926 and 2004, Ibbotson is forecasting a more moderate 9% average annual return going forward," he added.
Moreover, small cap stocks are still on their way to beating large cap stocks for the seventh straight year. That race could eventually rival the small cap sector's 10-year run up from 1974 to 1983. "But at this stage, the run may be just about over as small caps are getting pricey," he predicted.
Of greater concern to Ibbotson is the country's economic state of affairs. "I am rather concerned about the twin deficits, especially with the trade deficit reaching 6% of U.S. GDP," he noted. As for the Federal deficit, except for the 1990s where we saw Federal budget surpluses, we've had budget deficits almost every year since the 1960s, he added. But today's debt is different because it is now 50% owned outside of the United States," Ibbotson noted. "We no longer own our own debt," he said. "It has been a nice game to play, but how long will foreigners be willing to buy our debt?" he asked.
The Myths and Facts About Money Management
"No matter how you slice it, small cap stocks are sometimes cheap but always expensive," said Ted Aronson, CFA, founder and principal of Philadelphia-based Aronson + Johnson + Ortiz, and sub-adviser to the Quaker Small Cap Value Fund, which invests under a bottom-up, quantitative, sector-neutral style and currently contains 177 eclectic small cap value names. According to Aronson, there are three simple truths about managing money. "The total cost of running money is higher than most people think, many costs are insidious because nobody ever gets an invoice for them, and Wall Street loves those insidious costs; or they did until the mutual fund scandal revealed those hidden costs," he quipped.
Aronson offered some strong opinions and prognostications. "Performance-based management fees on mutual funds can actually hinder funds," he said. "When performance is good, the management fee rises which increases the fund's expense ratio. That, in turn, very often turns off investors who screen for funds based upon low-to-moderate expense ratios. Quaker recently removed its nearly nine-year-old fund performance fees for just that reason... the performance had been that good," Aronson commented.
In addition, Aronson predicts that trading costs of a penny per share will at some future time go to zero, and then may go negative. "Broker/dealers will pay us (money managers) to trade with them," he predicted. Also disappearing in the not too distant future will be soft dollars, he commented. "Five years from now there will be no such thing as soft dollars," he asserted.
Hard Currency Options to the Struggling U.S. Dollar
At the center of the U.S. economy and driving global growth is the U.S. consumer, whose spending now makes up approximately 70% of the U.S. GDP, said Axel Merk, president Merk Investments of Palo Alto, Calif. adviser to the Merk Hard Currency Fund which allows investors exposure to hard currencies such as the Euro, Swiss franc, Australian dollar and, indirectly, gold. "The consumer hasn't had a recession in over a decade, but consumers have increasing levels of debt coupled with a negative savings rate, and consumers nowadays are much more interest rate sensitive," he said. New rules require consumers to pay twice their credit card minimum payments plus, winter heating oil bills are rising, he added. On the other front, Corporate America is being squeezed and has little pricing power because consumers cannot afford to pay more and are buying cheaper foreign goods.
The news is equally as morose for the U.S. dollar. "We happen to believe that cash, as the traditional safe haven, is no longer safe as the U.S. dollar is at risk," Merk added. "Today, foreigners have to purchase over $2 billion a day in dollar-denominated assets to keep the U.S. dollar from falling further."
Merk noted that he likes the Australian dollar now, as well as gold, but hasn't favored the Japanese yen for over a year because Japan's market is flooded with liquidity.
Asian Emerging Markets and Japan's Resurgence
"Our investment philosophy is to be invested in the best places, and right now where we want to be are in emerging markets, China and Japan," said Ron Holt, CFA, of Hansberger Global Investors, which is based in Ft. Lauderdale, and serves as subadviser to the Harris Insight International Fund. In 2003, 2004 and 2005, international equities outperformed U.S. equities. "Our feeling is that international markets continue to be attractive," said Holt. "Over the past several years there has been a pick up in the globalization of trade which bodes well for international equities. Valuations and dividend yields have been superior, and strong sales growth as well as profitability is fueling earnings growth."
Emerging markets, which include China and India, are red hot now with consumer demand growing as more individuals enter the workforce and become consumers. And those countries supplying resources, including big oil producers like Brazil and Mexico, have been doing well. Also, there has been a resurgence in Japan that Holt believes is sustainable, he noted. "We're in the midst of a secular and cyclical recovery in Japan as consumer demand heats up and corporations spend more on capital improvements," Holt commented. "In addition, Japan's banking system has evolved with non-performing loans peaking two years ago. Restructuring efforts are now bearing fruit in terms of profitability."
The Pipeline to Biotech, Pharma and Healthcare
The long-term drivers are in place for good performance for the broad biotech sector, said Stephan Patten, CFA, portfolio manager at Montreal-based Sectoral Asset Management of Montreal, and co-manager of the Quaker Biotech Pharma-Healthcare Fund. "The population is getting older and will face more medical care and chronic diseases. That trend is helping to fuel the 7% to 9% growth of the pharmaceutical industry. Right now, 50% of the new drug applications are coming from biopharmaceutical companies," he noted. "But valuations for many companies are nearing their historic lows, with P/E ratios at 33 times forward earnings."
Acquisitions within the pharmaceutical industry will likely continue, with larger companies snapping us smaller ones as evidenced by recent purchases made by Novartis and Pfizer. "We think pharmaceutical companies will want to fill in their pipelines," Patten predicted.
"The Quaker Biotech Pharma-Healthcare Fund is finding the greatest value right now in the $1 billion to $5 billion mid-cap arena, and especially among companies just launching new drug therapies," Patten noted. These include Neurocrine Biosciences, which has a new drug to treat insomnia that lacks many of the negative elements of other insomnia drugs and is expected to get FDA approval next year, as well as CoTherix which developed a drug to treat pulmonary hypertension. The fund also has a proprietary advisory board that assists the fund managers with drug due diligence, and analyzing trends.
Mining Hot Spots in Subsectors
"We don't engage in sector rotation, but we do engage in subsector rotation," explained James McGlynn, CFA, Managing Director of Equities at Cincinnati-based Summit Investment Partners and portfolio manager of the Summit Everest Fund. The fund may overweight certain subsectors of a particular broader sector if opportunities are identified.
"Early in the year we were overweighted in railroad stocks versus all transportation stocks," McGlynn said. "While all sectors were impacted by rising oil prices, the railroad subsector didn't suffer much because railroads could pass along costs to customers and don't have to worry about foreign competitors the way auto makers do."
Although the fund is neutral to the consumer discretionary sector, it is overweighting broadcast media stocks where more advertising dollars are spent among media companies that are being restructured. Likewise, within the electric utilities and telecommunications sectors, the manager is neutral to utilities stocks but has overweighted telecommunications names including most of the Baby Bells which have fared well.
"Locking Up" Hedge Fund Adviser Registration
Ready or not, February is the deadline for many hedge fund advisers to register with the SEC. Some hedge fund advisers are asking whether to register or use the two-year lock-up exemption, and are weighing the pros and cons. And what will the SEC do? "They'll wait until February and may institute further regulations if they find that lock-up exemptions are widespread," said Janaya Moscony, CFA, founder and president of SEC Compliance Consultants in Philadelphia.
"I personally think the rule is a good idea if it can encourage advisers to tighten up controls and do the right thing," she said. "If not registered, managers could let things slide. But it won't avoid entirely unethical behavior or fraud."
"The SEC has prepared exam modules for its staff. But it will take a while for the SEC to understand the complexities of hedge funds," Moscony noted. "Those examiners who have worked on hedge funds in the past will be the first string of examiners."
To obtain more information about any of the mutual funds or companies cited, or speak with any of these investment professionals or industry experts, or learn how your company can take part in a future Millennium Media Consulting event, please contact Scott Tanner at Millennium Media Consulting, toll-free (866) 755-FUND (3863), or by email at millenniummedia@msn.com.