Like many Americans, Gina and Lybroan D. James are forming an opinion about President Bush’s plan to privatize Social Security. The plan would give individuals an opportunity to invest a portion of their retirement benefits in the stock market–something the James family feels cautiously optimistic about.
The James family has made a good life for themselves in Los Angeles. Gina, 32, is a systems analyst in the entertainment IT unit of NBC Universal. Lybroan, 36, recently quit his job as a math teacher and started his own real estate appraisal business, Rock Water Appraisal. Because they have two sons–3-year-old Lybroan G. and 3-month-old Nigel–they’ve been actively planning for their future. But Social Security and the stock market have not been their primary focus.
Why not? Gina explains that the president’s plan “only works if you know how to manage the stock market.” And she reluctantly admits, “I don’t know enough about how to invest. … There’s a big education piece that has to be included [in the plan].”
Lybroan says he’d welcome the chance to privately invest his Social Security funds, because the interest those funds currently earn hasn’t kept pace with inflation. “That’s why I’ve personally planned our retirement around real estate,” he says. “Historically, it gives a higher rate of return than inflation, and it’s easier to learn and manage than the stock market.”
While they both believe individuals could benefit from managing some of their Social Security funds, Gina and Lybroan say that such a plan could challenge African Americans more than others. “I don’t think it’s easy for the average person who has to work every day and take care of a family–unless you have a financial manager who can help you,” says Gina.
That’s why BLACK ENTERPRISE convened a panel of four accomplished investment professionals to discuss the market outlook for 2005 and the merits of the Social Security privatization plan. The members of our roundtable are Larry Jones, managing director of equity securities for NCM Capital Management Group Inc. in Durham, North Carolina, (which was ranked No. 7 on the BE ASSET MANAGERS list with $2.4 billion in assets); Michael Ray, vice president and head equity trader at Legg Mason Capital Management in Baltimore, the $44 billion manager of popular mutual funds such as the Legg Mason Value Trust fund; Ted Parrish, principal and portfolio manager for the $1 billion Henssler Financial Group in Kennesaw, Georgia, which offers the Henssler Equity Fund; and Brian Jeffries, CEO and president of Detroit-based Ambassador Capital Management, a fixed income-only shop with about $600 million under management.
BLACK ENTERPRISE: Social Security is a hot topic of discussion these days. If the Bush administration is successful in passing legislation allowing individuals to invest a portion of their Social Security funds, how does that change the markets and what investors should do with their money?
Larry Jones: The most direct beneficiaries of a change like that are publicly traded asset accumulators like Legg Mason, Franklin Resource, T. Rowe Price, and Janus. They will be managing the money, and their fees are based on the amount of assets under management. I would make sure I held a significant percentage of my portfolio in those companies.
More long term than that, we have a major issue: In 2018, the so-called Social Security fund goes negative, with more money going out than coming in. We’re going to have to borrow money to make up that shortfall. That means taxes are going to be raised and benefits are going to be cut for at least some part of the population.
Brian Jeffries: To me, Bush’s plan is akin to what we are seeing with a lot of public funds: the full transfer to defined contribution plans from defined benefit plans. There’s a lot of emphasis going into education, and that’s going to be an important aspect of his plan–to educate the participants about their options and some of the basic strategies of asset allocation and how to stick to a strategy.
How will it affect the market? There is going to be a great supply of money flying into the market, so you will probably see an initial pop. But everything comes back to the norm, so I would caution against investing for just the short term to get those market pops. You want to look for strong, solid companies, not market timing.
Ted Parrish: Consumers and investors should treat [these accounts] as a supplement to their current allocations. They should still max out their 401(k), or at least up their contributions to the level their company is matching, and contribute to their Roth IRA each year. Invest in high-quality, diversified companies and bonds.
Michael Ray: I probably look at this differently than most people. I don’t believe that Social Security is all that big of a problem. Even when we start to experience a funding gap in 2017 or 2018, it’s only because the number of workers–the Generation X and Y workers–won’t be able to cover the number of retirees in the baby boom generation. But, there are multiple solutions that could possibly fix the problem. As far as the shortfall goes, we would still be able to cover approximately 75% of the current level of payouts with no change to the system. So, when people say the system is going bankrupt, that’s actually not true. It’s just that you won’t be able to receive the same level payments that you receive currently.
BE: A lot of people think that Social Security is going to be there for them in retirement. How should people factor it into their overall plans for retirement and investing?
Ray: I don’t think anybody looks to Social Security for 100% of their retirement income. With the proliferation of 401(k)s, 403(b)s, Roth IRAs, and other ways to save for retirement, if people take the view that Social Security is only part of what they are going to need and they save on the other part, they shouldn’t really have any problems. Given that the savings rate in America is fairly low, and we know that people don’t always take the long-term view, it’s time for people to get more educated about the options available to them [and] find out how they can best prepare for retirement, just in case there is a cut in benefits or, in an absolute worst- case scenario, there are no benefits from Social Security.
Parrish: But I think that’s the problem. There are individuals who depend on Social Security as their only means of retirement income. A lot of people aren’t taking advantage of the Roth IRAs and 401(k)s. You have so many people at or below the poverty line who depend on Social Security that the plan might not go through because of that.
Jones: Another problem is that the promise is no benefit changes will occur to those who are at or near retirement. One way to approach this is to focus on the long-term return implied in what you actually collect on Social Security–about 2.5%. The chance to accumulate a much greater retirement nest egg, through your own means, will be the primary argument to persuade young people to participate.
BE: What strategies are you giving your clients concerning Social Security?
Parrish: We cater mostly to individuals, and for younger people we’ve discounted Social Security being there for them. That is until now. We are stressing the importance of growth. We invest most of their money in large-cap stocks then put some in mid-cap, small-cap, and international. We are taking an aggressive stance. For middle-aged people, if you have over a 10-year horizon, we’re putting a lot of their money into growth as well. The rule at my firm is that any money you need in the next 10 years needs to be invested in high-quality, fixed-income securities. Any money you need beyond that time frame should be invested in growth.
Jones: Our advice has a long-term focus, is fully diversified, and aggressive. One of the major mistakes investors make is g
oing with conservative investments over a long-term horizon. People should be shown charts of the difference in accumulation: small-cap and mid-cap returns have been in the high teens over the last several years, large-cap companies earned single-digit returns, and we’ve had a couple of good years in fixed income.
BE: What are some of the positive and negative trends you anticipate from the market in 2005?
Jones: We’ve come through a year of pretty strong economic growth, not the job growth many people thought should be occurring, but we did have close to 2 million additional jobs. Hopefully, that means there is a turnaround well on the way in terms of job creation. We’re fortunate to have a cheaper dollar. That should help our exports and industries like paper and heavy machinery compete with foreign companies.
On the negative side, the economy is slowing down. Our economic experts are toning down their expectations for 2005 to 3% or 3.5% growth. We enjoyed very strong profits in the corporate sector last year, 16% to 20% in various quarters. That will probably slow to 7% or 8% growth as we move toward the fourth quarter of 2005.
Ray: Essentially, we’re in a moderate-growth, moderate-inflation environment. I agree that we will have 3% to 3.5% GDP growth, and that’s fine in an environment where inflation is going to be roughly 2%. If those indicators are consistent during 2005, we should be able to grow the economy at a moderate rate and add an additional 2 million jobs. If that theory holds up, we should be able to keep interest rates fairly stable and we should see stabilization in the currency rates and energy prices. We had some spikes last year that negatively affected the market, and I expect things to trend back toward the norm.
Parrish: I think that 2005 is going to be a significant year for the larger-cap, multinational companies. Those companies have earnings persistence because of investments they’ve made throughout the downturn. Also, the weak dollar is going to be a boon for the multinational companies.
In 2005, everyone has already factored in high energy prices. I think they are going to be wrong on that. Energy prices are going to go down; oil prices will go back to about $35 a barrel and that is going to be a huge boon for consumers and corporations. It will really put more money in the pockets of consumers.
Jeffries: In 2004, it was primarily consumer spending holding up the economy, but I think we can look forward to corporations getting into the mix in 2005. We’re seeing business spending increases. What we need is for businesses to start putting some of those capital dollars into hiring.
BE: How can investors grow their portfolios in 2005?
Parrish: I don’t think individual investors should look to knock the cover off the ball in 2005. It’s not going to be a year where the money is going to be easy to make. You’re going to have to be very selective in the equities and look for 10% to 15% performance out of your stocks instead of 30% to 50%. I think the companies that are truly global are going to do extremely well because they aren’t totally dependent on the U.S.
Jones: My outlook for 2005 is a bit more muted. Because of slower corporate profit growth this year, that leads my firm to believe that a 3% to 5% return is most probable.
Individuals should not pay attention to any one forecast. If you are investing for your kids’ college expenses, your retirement fund, or to eventually open a business, you want your money to be compounding long term. You should own a fully diversified portfolio and adjust it over time. Certainly don’t time the market in and out. If you miss the best 10 days of the year, your return drops from 10% a year down to 2%.
BE: Where are the buying opportunities for 2005? Are there any sectors that really deserve attention?
Ray:
I really like the large, diversified financials–Citibank, J. P. Morgan, and Bank of America are excellent values. You’ll get a 3% to 4% dividend yield on those stocks. They are going to deliver 10% to 12% earnings per share growth numbers and they are relatively cheap. In this environment, these companies are going to experience loan growth on the back end, as people ramp up their spending. That’s a very attractive sector, for the individual investor.Jones: I have a couple of areas. Healthcare has not been a great sector performer, but our firm has done very well here in the last couple of years. We focus on the service providers such as HMOs and PPOs, as opposed to hospitals and the insurance companies. We also like healthcare companies with major products to be introduced within 12 months. We are very bullish on asset management companies. With Social Security reform, this is a new area of incremental growth in assets under management. We are also cautiously optimistic about the energy sector although we have no opinion as to which way energy prices are going to go. If China continues to grow and India continues to grow, the demand will be there.
Jeffries: From a fixed-income perspective, there are a couple of sectors that are attractive. One is emerging market debt, which will enable you to have a play in currencies. Secondly, I think municipal bonds are attractive. If you look at the yield curve and compare similar quality rating municipals to the Treasury curve, it’s a triple A. If you are in a 21% or higher tax bracket, you are going to benefit by being in that municipal security.
Parrish: For 2005, we think that financial services companies are going to be a good sector to be in. The good dividend yields, cheap valuation, and mergers and acquisition activity are going to be heavy in financials this year as well.
Healthcare is another sector I really like. We’re invested in some of the more prominent names like Pfizer and Eli Lilly. Those stocks are going to get a pop sooner or later because their financials are impeccable and all of them have really deep and growing pipelines.
Last but not least, there are some pockets in technology that are going to do pretty well. The services-oriented companies are going to do extremely well because they’ve lagged the hardware and software companies. Also, the equipment replacement cycle is not done yet, and technology companies are going to take advantage of that trend.
BE: Any last bit of advice that will help our readers be successful investors?
Jeffries: I’d like to really emphasize the importance of establishing an investment program early on and establishing an asset allocation. It might require working with a financial professional to determine the time horizon. Continue to dollar cost average. I believe that’s the approach to be successful over the long term.
Jones: Well, I think I’d like to say the best day to start investing is today. It’s never too early to start, even with small numbers. A basic, large, diversified mutual fund, either index fund or actively managed fund, is a great place to start. Read the business periodicals. Talk with your friends and look at what other people who have more experience are doing.
Place the maximum amount of money in your 401(k), or at least equal the money that is matched by your company. That’s free money sitting on the table, in terms of return, against your investments. And then stay abreast of what’s happening to Social Security so that if we do move toward separate Social Security investing accounts, you’ll be knowledgeable and ready to make your choice if it affects you.
Parrish: I’d advise investors to maintain a long-term focus when investing in equities or fixed income. Stay away from market timing because sitting on the sidelines in cash, waiting for the market to go down, is the best way to miss out on great opportunities. And resolve to fund your Roth IRA this year and every year.
Ray: Unless you’re an experienced investor, consult a financial adviser and always invest with a long-term time horizon and a long-term view. Sit down with
your investment professional and create an asset allocation program that you can stick with over the long term. Ultimately, the systematic [dollar-cost-averaging] investment approach works best because when the prices are high, you buy less. And when the prices are low, you buy more. Lastly, diversification is always a great tool. You should have exposure in different asset classes and you should spread your money across different sectors within the market. Have faith and good luck.
Larry Jones NCMÂ Capital Management
Franklin Resources: The company has about $380 billion under management and it has a large percentage of international holdings. Investors will look to diversify their holdings in a global manner, so exposure to international assets will grow faster than domestic. Priced in the mid-$60s, it could get up to $90.
Schering-Plough: The firm has a joint venture with Merck to create a new cholesterol-lowering product that has better performance than Lipitor, a $10 billion product. It could become the fastest growing drug company over the next five years. Priced around $20, it could reach $35.
Walt Disney: We hope they will bring in new management in June 2005 that will produce dramatically higher returns on assets. They have improved ABC, and some of its underperforming assets have turned upward. The company has the potential to go from $28 to $45.
| Company (Exchange: Ticker) |
Price at Recommendation* |
24-Month Price Target |
| Franklin Resources (NYSE: BEN) | $64.99 | $90 |
| Schering-Plough (NYSE: SGP) | 19.93 | 35 |
| Walt Disney (NYSE: DIS) | 28.15 | 45 |
| Sources: Yahoo! Finance, Larry Jones *As of jan. 21, 2005 |
||
Â
Theodore Parrish G.W. Henssler &Â Associates Ltd.
Pfizer: The company’s pipeline is strong and growing. I think the litigation risks are overplayed. This company has great financials, immense cash flow, and it’s going to have a major acquisition soon. You’re going to get double-digit returns going forward, maybe even more.
Affiliated Computer Services: This business process outsourcing company has projected earnings growth over the next three to five years of about 17%. The trend of outsourcing redundant tasks is going to continue. And, ACS is probably an acquisition target because IBM is getting heavier into that business.
Walt Disney: It’s the crown jewel of media because they have a set of assets that’s unmatched. It’s the first time in the company’s history that all divisions are doing well at the same time. The company has leverage to have 15% to 20% growth over the next three years.
| Company (Exchange: Ticker) |
Price at Recommendation* |
24-Month Price Target |
| Pfizer Inc. (NYSE: PFE) | $24.30 | $50 |
| Affiliated Computer Services (NYSE: ACS) | 52.05 | 70 |
| Walt Disney (NYSE: DIS) | 28.15 | Â 40 |
| *As of Jan. 21, 2005 Sources: Yahoo! Finance, Ted Parrish |
||
Â
Brian Jeffries Ambassador Capital Management
We believe individual investors should focus on municipals in 2005. If you live in a state that has a local tax rate, you want to stay focused on municipals from that state, if you can. Focus on the short term and intermediate area. We advocate mutual funds because an institutional money manager should be on top of all the market information, and you get better prices when you buy in bulk. Look at a fund with a relatively fair expense ratio, anywhere from 50 to 75 basis points. Funds such as the Munder Intermediate Bond A (MUMAX), Munder Tax-Free Short Intermediate Bond A (MUTAX), and Dreyfus Intermediate Municipal Bond (DITEX) are fairly priced.
|
Company (Ticker) |
Price at Recommendation* |
3-Year Annualized Return |
| Munder Inter. Bond A (MUMAX) | $9.53 | 4.61% |
| Munder Tax-Free Short Inter. Bond A (MUTAX) | 10.40 | 2.97 |
| Dreyfus Inter. Municipal Bond (DITEX) | 13.56 | 4.61 |
| *As of Jan. 21, 2005 Sources: Yahoo! Finance, Brian Jeffries |
||
Â
Michael Ray Legg Mason Funds Management
Citigroup: One of the most dominant financial companies in the world, their 3.4% dividend yield is nearly twice the dividend yield of the market average. They’ll grow earnings 10% to 12%.
General Electric: It’s a broadly diversified company that is AAA-rated. They have a great management team and a 2.5% dividend yield. GE should return 7% to 10% this year, plus you get a 2.5% dividend yield.
Nextel: The announced merger with Sprint should make it the fourth largest telecom and wireless company in the U.S. It generates excellent cash flow and also has above average-earnings growth. Nextel will benefit from call savings and synergies after the merger.
|
Company (Exchange: Ticker) |
Price at Recommendation* |
24-Month Price Target |
| Citibank (NYSE: C) | $47.51 | $52.26 |
| General Electric (NYSE: GE) | 35.13 | 37.59 |
| Nextel Comm. (NASDAQ: NXTL) | 28.59 | N/A** |
| *As of Jan. 21, 2005 **Growth estimates unavailable due to pending merger Sources: Yahoo! Finance, Michael Ray B.E. Research |
||
Â
Last Year’s Picks
Although the markets were up last year, our panel found it difficult to hit positive territory. Mutual fund and ETF selections from bond guru Valerie Mosley Diamond of Wellington Management Co. were up marginally. And Derek Batts of Union Heritage was the only stock picker in the black. Stephen Coleman of Daedalus Capital L.L.C. and Drake Craig of Atlanta Life Investment Advisors suffered double-digit losses.
| Valerie Mosley Diam ond Wellington Management Co. |
||||
| Company (Ticker) | Current Price* | Price at Recommendation** | Total Return | Current Value $1,000 Investment |
| Vanguard High-Yield Fund (VWEHX) | $6.39 | $6.00 | 6.50% | $1,065.00 |
| Select Sector SPDR Financial (XLF) | 29.52 | 28.19 | 4.72 | 1,047.18 |
| Select Sector SPDR Technology (XLK) | 19.78 | 20.86 | -5.18 | 948.23 |
Portfolio Performance 2.01% Current Value of $3,000 Investment $3,060.41
| Drake Craig Atlanta Life Investment Advisors | ||||
| Company (Exchange: Ticker) | Current Price* | Price at Recommendation** | TotalReturn | Current Value $1,000 Investment |
| UTStarcom Inc. (NASDAQ: UTSI) | $16.17 | $34.71 | -53.41% | $465.86 |
| Legg Mason Inc.*** (NYSE: LM ) | 75.15 | 57.05 | 31.73 | 1,317.27 |
| Pfizer Inc. (NYSE: PFE) | 24.35 | 35.85 | -32.08 | 679.22 |
Portfolio Performance -17.92% Current Value of $3,000 Investment $2,462.34
| Derek Batts Union Heritage | ||||
| Company (Exchange: Ticker) | Current Price* | Price at Recommendation** | Total Return | Current Value $1,000 Investment |
| Abbott Laboratories (NYSE: ABT) | $45.27 | $39.97 | 13.26% | $1,132.60 |
| Kellogg Co. (NYSE: K ) | 45.29 | 37.10 | 22.08 | 1,220.75 |
| Fannie Mae (NYSE: FNM) | 64.02 | 74.46 | -14.02 | 859.79859.79 |
Portfolio Performance 7.10% Current Value of $3,000 Investment $3,213.14
| Stephen Coleman Daedalus Capital L.L.C. | ||||
| Company (Exchange: Ticker) | CurrentPrice* | Price at Recommendation** | Total Return | Current Value $1,000 Investment |
| Nortel Networks Corp (NYSE: NT) | $3.13 | $6.46 | -51.55% | $484.52 |
| Charter Comm. Inc. (NASDAQ: CHTR ) | 1.65 | 4.78 | -65.48 | 345.19 |
| Wireless Facilities Inc. (NASDAQ: WFII) | 8.44 | 14.80 | -42.97 | 570.27859.79 |
| Â | Â | Â | Â | Â |
Portfolio Performance -53.33% Current Value of $3,000 Investment $1,399.98
*as of Jan. 28, 2005
**as of Jan. 28, 2004
***Legg Mason executed a 3 for 2 stock split on Sept. 27, 2004.
Total return reflects stock appreciation and includes stock splits and dividends.
Source: Yahoo! Finance
Â