Where To Invest In 2010

Expert market-watchers offer their outlook for the year ahead

Another ETF sector play is energy, Weddington asserts, since rising oil prices have fueled a rally for companies in the industry. He suggests the Energy Select Sector SPDR (XLE). Like Profit, Weddington sees technology thriving regardless of any slowdown in retail consumption. A way to invest in that growth: Technology SPDR (XLK). Conventional wisdom suggests that REITs (real estate investment trusts) may have a tough road in the beginning of 2010 due to a weakening commercial market. However, the money manager thinks they may be positioned to rebound sharply toward the end of 2010. To take advantage of that upturn, he suggests the DJ Wilshire REIT ETF (RWR).

Standard & Poor’s Stovall says investors might also consider funds tracking consumer staples such as the Consumer Staples Select Sector ETF (XLP), traditionally made up of defensive food and clothing companies that tend to weather any economic storm. To balance your portfolio, he advises an equal weighting in a technology ETF. “Tech’s been the best performing sector for close to 20 years but it’s volatile. History has shown, but does not guarantee, that if you hedge it with a stake in consumer staples and you can get the best of both sectors with a risk-adjusted return that’s better than the market itself.”

Bonds of Affection
Bonds, of course, are another traditional way for individual investors to hedge their bets. And if you think that 2009 was an action-packed year for the stock market, consider the drama in the fixed-income arena. As investors searched for shelter in the aftermath of 2008’s market meltdown, they stampeded into U.S. Treasuries in droves. After the dust had settled, early last year, a new mass migration began—this time to riskier fixed-income investments including junk bonds.

In 2010, bond investors have two issues to keep in mind: inflation and increasing long-term rates. A steep ramp-up in either of those factors can send bonds in a tailspin. Mary Pugh, CEO of the Seattle-based fixed-income institutional investment firm Pugh Capital (No. 12 on the BE Asset Managers list list with $1.2 billion in assets under management), says inflation doesn’t look to be a major factor despite the government’s burgeoning budget deficit. “Right now, there’s more likelihood of disinflation over the next couple of years,” she says. “One of the biggest drivers is the high unemployment rate—any time you have a significant portion of the population under- or unemployed, you’ll likely see wages dropping. We also have significant excess manufacturing capacity putting downward pressure on price levels. It looks as if we’re safe from increasing inflation for the next 24 months.”

Over the longer term, Pugh and Vanguard Group Inc. Portfolio Manager Gregory Davis agree the bond market expects interest rates to rise. Indeed, investors have begun to price higher rates into some longer-term holdings. Pugh and Davis advise investors to avoid the herd that rushed into junk and high-yielding bonds. Instead, they recommend a more measured approach. For instance, Pugh suggests that investment-grade, high-rated corporate bonds with a mid-range five-year maturity make sense right now.

Mutual Funds to Ponder
A large diversified portfolio is yet another hedging strategy that’s been readily available to individual investors. And, in keeping with the very measured outlook many pros have adopted for 2010, turning to mutual funds with solid management and good long-term track records will prove to be the favorable course for most investors.

Harry Milling, a mutual fund analyst for Chicago-based Morningstar, which tracks mutual fund performance, says Fairholme Fund (FAIRX), which scouts for undervalued companies to include in its very concentrated portfolio, makes the short list of well-run mutual funds worth considering. Another favorite: Fidelity Contrafund (FCNTX), a proven top-performer with a solid track record for spotting long-term trends. His final equity fund suggestions are Royce Special Equity (RYSEX) and Buffalo Midcap (BUFMX) both of which specialize in smaller companies that often lend a dosage of high-octane growth to a portfolio anchored in large company shares. Among his fixed-income fund picks, Millings recommends sticking with those with long-term track records such as Pimco Total Return (PTTAX) and Loomis Sayles Bond (LSBRX).
Whatever the final outcome in 2010, our experts tell investors to focus on long-term trends. “Many times individual investors get caught chasing returns and find that running after performance is a good way to get burned in the marketplace,” says Vanguard’s Davis. “The message is clear: You have to remain focused on the horizon, on a longer-term investment process.”

This article originally appeared in the January 2010 issue of Black Enterprise magazine.

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