9
Morningstar FundInvestor
April 2
013
its benchmark’s
65%
weighting. Inker doesn’t find
today’s bond yields attractive but also isn’t bullish on
stocks given the firm’s view on equity valuations.
He says the “Internet bubble of
2000
was the worst
point of overvaluation for the S
&
P
500
in its history,”
and, while equity valuations have come down since
then, “the healing process is not yet done and the U.S.
equity market is likely to continue disappointing
investors for a few years longer.” Instead of stocks and
bonds, he holds a hefty
18%
stake in the firm’s long-
short equity strategy,
GMO Alpha Only
GAPOX
, as a
source of assets for when market conditions change.
Rob Arnott takes a decidedly different approach. His
focus on current yield as a valuation metric often
leads to net equity exposure below
30%
of assets.
At the end of
2012
,
PIMCO
All Asset held nearly
70%
of its assets in bonds, while
PIMCO
All Asset All
Authority maintained a
60%
stake. Like the other
managers, Arnott has concerns about rising interest
rates, which is why most of his bond exposure
comes from high-yield and emerging-markets bonds.
In both funds, Arnott has reduced Treasury Infla-
tion-Protected Securities allocations over the past
year, as he finds the securities too expensive. For
All Asset, this has led to an increased equity stake of
19%
, up from
13%
at the beginning of
2012
. In All
Asset All Authority, the fund has a
4%
net short posi-
tion in stocks, because of Arnott’s unfavorable view
on equity yields.
Not All Equities Look Great
While several of our Gold- and Silver-rated allocation
managers favor stocks over bonds, they are partic-
ular about which stocks to own. Both T. Rowe Price
and
JP
Morgan favor large-cap equities over small
caps, as they believe small-cap stock valuations are
too high. In fact, the gap between the price/earnings
ratio of the small-cap Russell
2000
Index and that
of the large-cap Russell
1000
Index is the widest
it’s ever been, as of December
2012
. Inker also leans
toward large-cap stocks but goes a step further
by preferring high-quality large-cap companies. These
businesses have low debt levels and stable profit-
ability that should provide ballast in challenging
market environments.
Most of these managers also find foreign stocks more
attractive than domestic equities. Among developed
markets,
JP
Morgan’s allocation team likes European
stocks, excluding U.K. equities, for their cheap valua-
tions relative to other developed markets. Inker at
GMO
also finds some developed markets attractive, as
he has found relatively cheap equity valuations in
Europe and Japan. Stattman also likes the valuations
of Japanese equities, allocating
7%
of the fund’s
assets there. He believes Japanese stocks are oversold
and that the country’s recent fiscal and monetary
reforms will help its economy. (See The Contrarian for
more thoughts on this.)
Many of the managers have favorable views on
emerging-markets stocks.
JP
Morgan, T. Rowe Price,
and Arnott have long-term biases toward emerging-
markets stocks over developed markets, as the
managers like the growth prospects and economic
fundamentals of emerging markets.
Take-Away
Making tactical allocation shifts is a tricky business,
as it requires both foresight and patience. These
managers have shown over long periods of time that
they can add value through tactical shifts. Under-
standing the views of these top allocators can help
set expectations for investors, even if investors
aren’t tactically moving their portfolios. For instance,
the managers’ uniformly negative stance on U.S.
government-related debt suggests that investors may
want to be mindful of that area of their portfolios.
For the more tactically inclined investor, as several of
these managers make clear, it may help to remember
that cash and other liquid securities can be useful
when the market doesn’t offer many clear bargains.
œ
Contact David Falkof at
