Investing

Where to invest $10 000 right now

Five experts reveal the opportunities they see around the world.


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Market strategists are using words like “frothy” to describe the developed world’s equity markets. They’re speculating about when the “twin Energizer bunnies known as the stock and bond markets” will run out of juice. For anyone with spare cash to invest, it’s a nail-biting moment to enter the fray.

Some calming news: The five investing experts featured in this quarterly series have lived through many stock market cycles, and they don’t scare easy. This year, they see opportunities across a wide range of sectors and investing styles, from energy stocks to preferred stocks to value-oriented exchange-traded funds (ETFs). Notably, none of them is recommending technology stocks — far from it.

To see how the perspectives of our panelists have evolved over the past year or so, click on one of the tabs below their names.

Some of our experts run mutual funds or investment portfolios that follow their recommended strategies and themes. Bloomberg Intelligence ETF analyst Eric Balchunas adds his twist to the investment mix by choosing exchange-traded funds that reflect the experts’ investing themes and tallying up how the previous quarter’s ETF suggestions performed.

One caveat: Before you make a move, be sure you’re familiar with the Seven Habits of Highly Effective Investors. These are the basics— seven simple ways to increase the odds of getting in and staying in good financial shape.

For instance, your emergency fund should ideally hold enough to cover your cash flow for six months — or longer if you’re a high earner and could face a longer job search if you’re laid off. You want enough saved so that if a financial emergency comes up, you aren’t forced to liquidate any financial holdings at an inopportune time or make any other forced withdrawals.

If you’re set on the basics, consider these strategies for the current, uneasy quarter.

Richard Bernstein

Chief executive officer, chief investment officer, Richard Bernstein Advisors

Favour cyclicals over ‘disrupters’

Today seems like a mini version of 1999. Back then, investors thought the only sector for growth was TMT (technology, media and telecom) and bid those stocks to ridiculous valuations, even though the average S&P 500 company was increasing earnings by nearly 20%. Buying supposed growth companies with astronomical valuations might remotely make sense during a recession, but it proved ludicrous in an environment of accelerating growth. TMT’s bogus growth forecasts eventually gave way to the actual earnings growth of companies operating in the real economy. 

Today, investors have rushed to the “disrupters,” which, just like the internet stocks of the late 1990s, are promising out-of-this-world growth. “Out of this world” is not a figure of speech — three companies are vowing to go to Mars. Meanwhile, the average forecast earnings growth rate of companies here on Earth is more than 20% (based on the constituents of the MSCI ACWI index, the All Country World Index).  

The disrupter companies have feasted on the Federal Reserve’s low interest rates. Investors can easily speculate when the risk-free rate is close to zero percent. These companies will have to produce earnings and cash flows as the Fed raises interest rates and the companies’ cost of capital is no longer free.  

History suggests that traditional cyclical companies tend to outperform when the interest rate cycle heats up. Companies with accelerating earnings and cash flows have the ability to win the tug of war against the negative effects of rising rates. 

Despite the post-election disappointment over Washington policy and the resulting underperformance of cyclicals, these stocks seem attractive relative to disrupter stocks. Earnings are still revving up, and the Fed seems intent on raising rates. Accelerating reported earnings growth and rising interest rates have never been a good combination for dreams of a utopian future.

Way to play it with ETFs: The Vanguard Consumer Discretionary ETF (VCR) is cheap, deep, and liquid. It’s a good buy-and-hold sector ETF while you wait for rates to rise.

Performance of last quarter’s ETF plays: For ways to play Bernstein’s interest in inflation-sensitive assets, Balchunas cited the Materials Select Sector SPDR Trust (XLB US) and the Financial Select Sector SPDR Fund (XLF).    

The ETFs gained 3.2% and 4.2%, respectively. The Energy Select Sector SPDR Fund (XLE) fell 6.6%.

 

  

Sarah Ketterer

Chief executive officer and fund manager, Causeway Capital Management

Fuel up on energy

Buy high-quality energy. Investor scepticism weighs heavily on the sector, making this one of the more promising areas in this mature bull market.

Oil and gas companies exhibit cyclicality in sales and earnings, traits that investors have shunned in recent years in favor of steady growth. Relative to high-flying technology stocks, the recent performance of energy equities looks abysmal. Over the past 12 months, global energy indexes have underperformed global technology by more than 30% and are trading at a sizable valuation discount.

The forces of supply and demand dictate the price of semiconductors as well as oil, with the lowest marginal cost producers having a distinct advantage over the competition. Advertising, including the internet, also has a cycle. The last time markets ignored the cyclicality of technology was in the late 1990s, a rough period for the most overvalued stocks.   

Investors may be worried about a global glut of crude oil, especially from rising US shale oil production. US shale productivity continues to surprise on the upside, especially in the Permian Basin. As marginal costs have fallen from 2014, oil producers have increased wells and drilling volumes. The threat of a possible lack of Opec production discipline also clouds the oil price outlook.

But exploration and production costs have recently turned upward in pressure pumping, sand, rail, trucking and labor. Oil-producing nations, including Opec members as well as US shale producers, cannot afford to spend more cash than they generate. As industry profits get squeezed, oil and gas companies’ credit ratings deteriorate, constricting lending to energy. At current spot prices, the world’s oil and gas industry doesn’t generate enough cash flow to sustain the spending required to expand capacity. In US shale, production volumes per well decline particularly rapidly without additional investment. 

On the demand side, the energy industry will not thrive in a recession. But technology doesn’t fare well in that scenario, either. Expect at least two more decades of rising demand for crude oil and gas, as electric vehicles will only gradually substitute for gasoline. 

Look for companies with productive acreage and experienced management, financial strength, and cyclically low valuations. As the crude oil price recovers — perhaps approaching $60 per barrel, with natural gas reaching $3.25 per thousand cubic feet — energy sector share prices should prove rewarding.

Way to play it with ETFs: The Energy Select Sector SPDR Fund (XLE) is high-quality energy. Top holdings Exxon Mobil Corporation, Chevron Corporation, and Schlumbergermake up more than 40% of the portfolio. There’s a liquid market for the ETF, and it’s cheap, with a fee of 0.14%.

 

Performance of last quarter’s ETF plays: The SPDR S&P International Health Care Sector ETF (IRY) was Balchunas’s pick as a way to play Ketterer’s focus on big pharma companies selling at a discount. It returned 7.9% from March 31 to June 30.

 

Barry Ritholtz

Chairman and chief investment officer, Ritholtz Wealth Management

Buy value

The last two times out, we looked at two out-of-favour asset classes. The first was emerging markets, which were not only cheap but are widely underrepresented in American portfolios. The second was European equities, also cheaper than US stocks and wildly out of favour (and also underrepresented). 

They each worked out much sooner than expected. This one, I promise you, will take longer. But it will be worth your patience to see it through. 

Buy large-cap American value.

The academic research has demonstrated time and again that value beats growth over time. The problem is, growth can get hot and trounce value for long periods—like pretty much all of the past decade. Based on the Russell indexes, large-cap growth has been the No. 1-performing equity asset class for the past three, five and ten years. The ten-year returns have averaged 8.9%. Pretty good, considering that decade includes the financial crisis of 2008-09.

Eventually, mean reversion rears its head. The underperforming value stocks start doing better; the overperforming growth stocks start doing worse. Timing this is all but impossible, but when the spread between the two becomes inordinately wide, value becomes increasingly more attractive. 

Currently, the spread between the performance of value and growth is about as wide as it gets. Which means even though we are likely early, this is usually a good time to start legging into more value holdings. 

Investors wanting to participate can get inexpensive exposure by buying an exchange-traded fund or mutual fund. My default setting is inexpensive Vanguard funds. Try VTV, their large-cap value ETF. It has about $31 billion in assets, and its holdings have an average market capitalisation of $83.4 billion. It has a dirt-cheap expense ratio of 0.06%.

Way to play it with ETFs: The Vanguard Value ETF (VTV) is the fastest-growing smart-beta ETF and very cheap, with a fee of 0.06 percent. The price-earnings ratio, however, is about the same as that for the S&P 500 Index. For investors who want deeper value and a lower P/E, options Balchunas also likes include the iShares Edge MSCI USA Value Weighted Index Fund (VLUE) and the actively managed ValueShares US Quantitative Value ETF (QVAL).

Performance of last quarter’s ETF plays: Ritholtz and Balchunas were both fans of the Vanguard FTSE Europe ETF (VGK), which had an 8.3% return, and the SPDR EURO STOXX 50 ETF (FEZ), which gained 25.5%.

 

Russ Koesterich

Portfolio manager, BlackRock Global Allocation Fund

Seek yields with protection

There are times to stretch and take more risk, and there are times when discretion is the better part of valor. Following a bull market that turned eight years old in March and countless trillions of dollars of central bank asset purchases, few asset classes are obviously cheap. Still, in a world in which interest rates are barely 1%, investors can be forgiven for not wanting to stick their spare cash under the mattress.

This suggests to me a compromise: finding assets with a respectable yield that will provide downside protection if markets turn south.

US preferred stock is currently yielding about 5.50%. This compares favorably with most of the other alternatives, including high-yield, investment-grade and emerging-market debt, and a basket of US common dividend-paying stocks. [Preferred shares are sort of a stock and bond hybrid; they generally pay a fixed dividend and put you ahead of common-stock holders in cashing in shares if the company’s assets are liquidated.]

More to the point, following a disastrous period during the financial crisis, preferred stock has become a much less volatile asset class, currently offering the most attractive ratio of yield to volatility of the yield-oriented plays. Comparing the yield to the three-month trailing volatility of the asset class, you get a ratio of more than 1.3. In other words, investors are receiving 1.3 percentage points of income for every percentage point of annualised volatility. This is significantly higher than any of the alternatives.

Some will recall that preferred stocks did not live up to their reputation for low volatility during the financial crisis. At that time, an index of US preferred, dominated by financial issuers, fell approximately 70%, worse than the broader market.

I see much less downside risk today. It is not clear that US financials will be at the epicenter of the next crisis, as was the case in 2007-09. The sector is much better capitalized and run more conservatively than it was 10 years ago.While preferred stocks aren’t likely to send anyone’s heart racing, a yield of 5%-plus in a world still characterised by low rates, high valuations, and uncomfortably low volatility is worth a look.

Way to play it with ETFs:The iShares US Preferred Stock ETF (PFF) currently yields 5.6% and has great liquidity. Its 0.47% fee is high for an ETF but below average for an ETF specialising in preferred stocks.

 

Performance of last quarter’s ETF plays: To follow Koesterich’s strategy of focusing on Asian equities, Balchunas pointed to the iShares MSCI Japan ETF (EWJ), which gained 5.2%, and the iShares MSCI Emerging Markets Asia ETF (EEMA), which returned 8.5%.

Principal and global head of Vanguard’s Equity Index Group (new to the panel of experts)

Avoid taking on more risk  

Investors who have $10 000 to put to work may well be experiencing the anxiety caused by what I call the asset allocator’s dilemma. After several years of strong equity market returns and interest rates at historic lows, the major asset classes don’t look all that spectacular from a valuation standpoint.

Equity valuations, while not in bubble territory, are a bit stretched, leaving many investors sitting on their hands waiting for a correction or searching for a shiny, undervalued opportunity. And while fixed income can still play a diversification role in a portfolio, yields remain historically low, providing very little income. Hence the dilemma. 

Faced with this dilemma, behavioral biases can lead investors to consider alternative asset classes or taking on additional risk. Perish the thought! You may be tempted to aim for the sky in a bid for stellar returns, but like Icarus, whose wax wings melted when hubris caused him to fly too close to the sun, so too will you risk a portion of your $10 000 investment melting away. 

It’s tempting at times, and the current market is one of those times, to chase a narrow “opportunity” that hubris says will outperform. Resist this temptation and do exactly the opposite. If you’re an equity investor, consider investing in a broad market capitalization-weighted index fund that covers the global stock market. The best equity investment opportunities may not be obvious in this environment, but I can guarantee they’re contained in such a portfolio. 

Now is the time to double down on strategies that are tried, true and lasting, such as low cost, diversification, low turnover and tax efficiency — all things you can put to work in your favor, and all things that an index fund offers.

Boring? Maybe. But they’ll keep you from flying too close to the sun.

Way to play it with ETFs: The Vanguard Total World Stock ETF (VT) covers the entire world in one shot, Balchunas notes. It represents more than 7 700 stocks in 60 countries; half of its holdings are in the US It has a fee of 0.11%.

© 2017 Bloomberg

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