Many mutual fund managers have shifted into cash lately as a safe haven, something individual investors should note, cautions Ryan Leggio. He offers a suggestion about one of his top fund picks, which is offering opportunity for investors with a longer time horizon.
Kate Stalter: We are speaking today with Morningstar fund analyst Ryan Leggio. Ryan, I’m really happy to have you join us today, because I think you have a really interesting perspective on mutual funds for individual investors. So, give us your take on the current market conditions, and what investors should know about these days.
Ryan Leggio: We’re speaking in late August, and the markets have been quite volatile since the S&P downgrade of US Treasuries from AAA.
It's interesting to note that the ten-year bond hit 2%, one of the lowest levels in decades. It’s now back up to 2.2%, but bond yields across the board have really come down. Also interestingly, Treasury Inflation-Protected Securities on the five- and ten-year durations are now either negative or flat, so investors are getting really, really small yields in fixed income.
But because of the flight to quality, so to speak, equities have also taken a hit, with emerging markets and the S&P down.
In terms of the opportunity set, given that backdrop of relatively low yields and volatile equity market, a lot of the go-anywhere managers I talk to are increasingly having to go to asset classes that they weren’t investing in, say, three to five years ago, because they were finding values in the fixed-income area or in Treasury Inflation-Protected Securities.
One manager I talk to, and one fund I cover, is Rob Arnott of PIMCO All Asset Fund (PASAX). It’s a fund of funds, where he’s able to invest in the areas he finds the most attractive. Right now, and over the last few months and quarters, he’s invested more and more of that fund’s assets in very liquid, cash-like instruments, really just waiting for a better opportunity.
A lot of the other managers that I talked to that are also go-anywhere, they are saying the same thing. Cash levels are a little bit more elevated now, they’re not finding as many opportunities as they certainly did in early 2009, and there may be some lessons there for investors.
Kate Stalter: What would you say, then that an investor should be taking away from these developments? What should investors be doing next?
Ryan Leggio: The big determinant is the time horizon for an investor, and clearly the shorter the time horizon, the more investors want to be looking at bond funds or conservative allocation funds.
But, the longer time horizon that investor has, they certainly can take on risk.
I think the takeaway from these go-anywhere managers is that even if you have a very long time horizon, the opportunity sets are not as attractive as they were in mid-to-late 2009. So you probably want to be taking on, according to these managers, a little less risk even if you have a very long time horizon—five, ten, 15 years.
So some of the areas that look attractive, even if you have a really long time horizon, could be emerging markets, equities, and fixed income. Those markets have certainly come down quite a bit.
Emerging markets are down more than 15% this year, and so they certainly offer a better opportunity than they did when they were 15% or 20% higher. A lot of the managers like emerging markets just because the growth prospects are better than the domestic world, and the balance sheets for a lot of the countries are a lot better.
The other area where a lot of go-anywhere managers are finding values—and again, this is for long-term investors, meaning five, 10, 15 years—are what we would deem high-quality global franchises, what Morningstar calls “wide moat” firms. These are companies like Coca-Cola (KO) or Johnson & Johnson (JNJ).
One of the managers that we closely follow—it is an Analyst Pick, one of our highest designations for mutual funds—is the Yacktman Fund (YACKX). He’s continuing to find the best values in those types of firms with top holdings like Microsoft (MSFT) and Pepsi (PEP).
But again, going back to my earlier point, he has more than 10% of the fund's assets in cash—so you know, these aren’t screaming buys like they were in 2009, but still good opportunities for long-term investors, in his opinion.
Kate Stalter: Anything else right now, Ryan, that you think individual investors might want to research, as they’re looking into where they might want to go in the future?
Ryan Leggio: Sure. Again, depending upon the investor's time horizon, I certainly would recommend investors check out the Yacktman Fund and his shareholder letters and calls for a good insight into the possible opportunities that are out there for longer-term investors.
For shorter-term investors that need a fixed income-type portfolio, I think it’s pretty tough. I think they should certainly look at some of the articles on our Web site that describe the issues facing investors in corporate fixed income, the high-yield fixed income, municipal bonds, and Treasury Inflation-Protected Securities.
But I think investors need to realize that the risk-reward opportunity for a lot of these fixed-income funds, whether they be active or index funds, has changed dramatically in the last couple of years.
You know, the five year treasury bond is now yielding right around 1%, so investors that are looking at these types of short-term bond funds can often find better opportunities with, say, an online, FDIC-insured savings account that can yield anywhere from 1% to 1.5%.
I think investors need to definitely consider that as a possible option and also just bear in mind: With your bond yield moving from 3% to close to 2.25%, the risk-reward has certainly changed. So just be cognizant of those risks.
Kate Stalter: Things certainly have changed if we’re talking about savings accounts as a place to take a look at seriously these days. That’s quite a shift.
Ryan Leggio: Yeah, absolutely. I mean, a few years ago—in 2006 and 2007—savings accounts were yielding 2%, 3%, and more. Now those are yielding 1% or less, and you know bond yields have come down dramatically. But, in many cases, investors can find FDIC-insured savings account yields that are pretty attractive compared to the fixed-income yields that are available on the market.
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