RM: Mr. Bernard, other than the U.S., where in the world are currently investing assets?
GB: There has been tremendous turmoil and volatility in economies around the world over the past six years. This has created potential opportunities in large-cap, dividend-paying European corporations with solid balance sheets. Also, some emerging market companies, especially in China (even though growth has slowed) have corrected (price-wise) and may represent real value. We believe it makes sense to build positions in these types of firms because pricing seems reasonable and their upside potential is too attractive to ignore.
RM: What is your current allocation for growth portfolios?
GB: Normally, we divide the portfolio by 80% equity, 17% fixed income, and 2-3% cash. Today, we are much more defensive due to current market volatility. We are roughly 60% equity, 28% fixed income, and 12% cash. The bulk of the equity weightings are focused in the U.S., with 10% dedicated to both Europe and emerging markets respectively.
RM: Does gold have a place in your portfolio?
GB: Normally we would say no, but as a hedge against currency volatility, we have dedicated 3% to gold but we may increase exposure to as high as 5%.
RM: How will the fiscal cliff affect 2013 earnings?
GB: We have two points of view. First of all, it is already impacting the economy. Because of uncertainty, companies have started to cut their investments and spending. Looking forward, the 3.8% tax to fund the Affordable Care Act will hit high net-worth individuals on January 1st. We also know that companies will have to spend more money to meet the new regulatory requirements. So in the very short term, we think individual and corporate incomes are going to suffer because of higher taxes and higher expenses. However, we feel toward the second half of 2013, things will stabilize and our long-term outlook is reasonably positive.
RM: How difficult is it to invest today as compared to 20-30 years ago?
GB: Because our philosophy focuses on fundamentally solid companies to safeguard a portfolio for long-term investing, things haven’t changed much from our perspective. Actually, since technology and the Internet have reduced expenses and increased the amount of information we have access to, we think it’s a good time to invest. However, because of heightened competition in institutional markets, traders looking for quick hits are unfortunately at the mercy of large conflicting forces which can create high short-term volatility.
RM: Over the next couple of years, what do you consider to be a reasonable rate of return on equities?
GB: If history is any prelude, not a guarantee, to the future, over the last 50 years, the average return on all capital, fixed income and equity, has been around 7%. For someone who is willing to assume a bit more risk with a growth portfolio, we believe—with the caveat that potential volatility will always be present—that a reasonable rate of return for someone who can stay the course could be around 8-10% over the long haul.
RM: Lastly, if you were to write a next-generation book on investing, what is the most important piece of advice you would impart to your readers?
GB: We all pay attention to the local (meaning U.S.) markets, but our true corporate champions compete in the global economy. So once again, let’s refer back to fundamentals and pose the question: does the company have the capability to manufacture and deliver products that address real global needs? I like to use the old Dow anchor, General Electric, as an example. Sure, they make jet engines and appliances, but they also have created a water filtration system that is in great demand in many emerging market countries, where tens of thousands of people die every year due to lack of clean water. So, to answer the question, we focus on strong global companies with solid balance sheets, innovative products for the future, and a clear vision for long-term growth as the key to constructing a well-balanced portfolio.
Have a productive week.
The Update is written by Chris Leone and Ron Mastrogiovanni.
Weekly Update – Adventures in Holiday Shopping
This is a tough time of year for the married male holiday shopper. Newlyweds have it easy, but holiday shopping becomes increasingly more difficult as the anniversaries pile up. After a decade or two of jewelry, trips to exotic locations, weekend jaunts to see Broadway shows, clothing, cookware (joking) and day-of-beauty gift certificates, there’s not much left to the imagination. Even though retailer Bed Bath and Beyond (BBBY) appears to be a good stock to buy right now, I don’t think a stainless steel cheese grater will put me in my wife’s good graces.
One advantage today’s shoppers have over the dark days of mall excursions is the Internet. I remember meandering around shops with titles like “Things Remembered” and wondering would Marea like a personalized clock? Worse was entering the chaos of Macy’s in December; it was like being the proverbial deer caught in headlights of oncoming traffic.
“Coco by Chanel,” one saleswoman pounced as I entered the human reconstruction arena where attractive women attempted to capture my attention with new fragrances and makeup techniques that “Marea could not live without.” I always wondered what Marea’s reaction would be to a stocking stuffer consisting of a beautifully-wrapped aging, hyper-pigmentation, or skin-repairing serum designed to takes years off a gal’s appearance.
Anyway, my last holiday gift-buying disaster took place at a costume jewelry operation called Pandora, a retailer not on my radar. I was strolling through the mall one afternoon close to Christmas when I noticed several guys in line at the Pandora store. This had to be the “in” thing! I looked at a display in the window and decided I would pick up a bracelet the following morning when the line disappeared.
So, the next day, with my mission clear, I drove to the mall early and went directly to Pandora. I was surprised when I walked in because there wasn’t much of a selection of bracelets on display.
A patient salesperson explained, “Customers actually designed bracelets with an array of meaningful charms. How many would you like?”
I thought that was a rather unusual question. Of course, I needed the finished bracelet for our gift exchange that evening, so I replied, “Filler up!”
Two young salespeople helped me go though racks of charms representing first dates, children, divorces, and who knows what else. This was no ordinary jewelry buying experience; designing a charm bracelet is a tedious time consuming process requiring numerous relevant decisions. Choose an inappropriate charm and who knows what kind of trouble a guy can get himself into.
Once my bracelet was constructed, the lead salesperson took out her calculator to add up the damage. She discretely showed me the total, which was more expensive than I expected to pay for costume jewelry: $475.00. At that point, I was into the bracelet construction process for at least an hour and had to get to work, so I told her to wrap it up. Task complete.
Later that night, I proudly handed Marea the perfectly wrapped gift box, waiting for a warm embrace.
“I’m not into Pandora,” she said.
Surprised once again, I immediately responded by asking her to at least look at the bracelet before sending me through my traditional gift-giving repudiation process.
She did. “You filled up the entire bracelet with charms?”
I laughed and said, “Why would I give you a bracelet that is still under construction!”
She looked somewhat confused and asked me what my little Pandora gift cost. I eventually told her and she didn’t believe me, demanding to see the receipt. She looked at it and asked, “You paid $4,750.00 for this?”
Was she crazy? I looked down and sure enough, there was an extra zero at the end of the total. I was stunned! (Pretending to not need reading glasses can definitely be costly.) No wonder why the two sales girls laughed at all my jokes! Luckily, Marea was not into charms and agreed to return the bracelet, since I was too embarrassed to bring it back myself.
Thankfully, those days are gone, and now I virtually roam around retailers such as Gorsuch, Patagonia, Tiffany’s, Nordstrom’s and Macy’s on the Internet. I can sit at home in the comfort of my pajamas and make similar miscalculations in less time without dealing with the overwhelming mall traffic.
Which reminds me, the Internet will only make up around 12% of holiday purchases this year, telling me that Amazon (AMZN) is positioned to experience significant future growth opportunities. Traders and investors, including investment manager George Bernard, have been disappointed in Amazon’s recent results, however, I believe Amazon may make a great gift to yourself, your spouse, kids, and grandkids. Also, given the upswing in our economy, consider adding FedEx (FDX) or UPS (UPS) to your holiday portfolio.
Probably more importantly, here is a potentially critical investment holiday warning. During this hectic time constrained period of the year, be careful when performing reconstruction work to position your portfolio for 2013. Do not purchase mutual funds in December unless you are aware of the fund’s 2012 tax consequences.
Let’s say, for example, you purchased a fund on December 6, and you lose 1.5% of your investment by the end of 2012, you will still pay taxes on gains generated by the fund for the entire year despite the fact that you lost 1.5%! If you acquire shares of a fund in a taxable account prior to the fund’s distribution (X) date, you may be liable for the tax consequence related to its 2012 capital gains and dividend distributions. Hence, just as I shouldn’t have bowed to the pressures of buying a last minute gift, make sure you are not exposed to an unnecessary tax bill when rushing to purchase shares of a mutual fund in December.
Have a productive week.
The Update is written by Chris Leone and Ron Mastrogiovanni.