Friday, March 23, 2012

Five Contrarian Investment Plays for 2012

As I mentioned yesterday, I've been attending an "Asset Gathering" conference here in Boston. 

Throughout the day I was struck by the near-uniformity of opinions when it came for the outlook for the markets.

In addition, nearly all the speakers shared similar themes when it came to asset allocation.

It is axiomatic in the investment world that in order to make money you have to have a opinion that is different than the consensus. Consensus views are usually already priced into the markets; if you want to make money, you have to wager that the consensus has it wrong in some respect.

Here are five topics that were discussed in great detail.  It seems to be a pretty safe bet that at least one, if not more, of these ideas will prove to be wrong:

1. Interest Rates Are Headed Higher.  Ever since 2002, strategists and economists have insisted that bond yields are too low, and the next move for rates is higher.  Interest rates, of course, have done just opposite of what every one forecast.  Maybe they'll be right this year.

Interestingly, in response to a question from the audience, no one on the panel discussing asset allocation thought you should be selling bonds now, even though they all thought that rates were headed higher.

2. Stocks are Due for a Correction of -5% to -10% fairly soon, probably in the second quarter.  Much of this sentiment is based on the strong move that the markets have had since last fall, and not so much on any fundamental data.

3. There is no value-add in active management of domestic stocks.  Interestingly, this sentiment is so widely accepted at a time when the correlations between stock price movements has been falling rapidly.  This should mean that a good manager will increasingly be able to find opportunities in sector or stock picks, but no one seemed to believe this.

On the other hand, all seemed to agree that active management of foreign stocks - including emerging markets - makes sense.

4. Alternatives should play an increasing role in client portfolios.  What's interesting about this widely-held view is that no one ever presents any data that shows that investing in private equity, hedge funds, etc. actually was a money-winner.  This is sort of the "Tinker Bell" approach:  Clap if you believe.

5. High Yield and Non-Dollar Denominated Bonds are Good Alternatives to US Treasurys.   However, if the economy is really on the precipice of another downturn - as several speakers suggested - junk bonds will fare very poorly.

And buying bonds of other countries carries significant currency risk - a rising dollar will wipe out any possible yield advantage from foreign bonds.

Every speaker agreed that "educating your client" would be a very important for success in the investment management business in 2012.

I might suggest that the education efforts could be aimed at the members of my industry as well.