Rebound Or Relapse? - Page 4 of 8

Rebound Or Relapse?

portfolio. You can’t go back and recover that [money]. The best thing you can do is just forget what happened in the past, look at what you have right now, and be very prudent and very judicious in how you handle it.

We are responsible for the stewardship of our own investments and good stewardship doesn’t mean being overly focused on risk and, therefore, not taking any risk and not getting any return. It also doesn’t mean being overly focused on return and taking too much risk. It means striking a balance between risk and return, and that is best accomplished through diversification.

PUGH: On the fixed income side, an intermediate maturity approach would generally be appropriate. If they are talking about a 10-year horizon, that would be fine if they are buying bonds outright because they can hold them to maturity. Depending on their tax bracket, taxable municipal bonds are a good place to look because they are trading relatively close to the yield of the treasury. I also like mortgage-backed securities. They have very high credit quality. They tend to yield a lot more than treasuries or agencies, so you’re picking up incrementally, typically 1% to 1.5%.

B.E.: What are some of the other promising sectors for investors?
PUGH: The sectors we like [within fixed income] in terms of fundamentals, positive improving fundamentals and best relative spread value, would be the cable sector. It’s a business that generates a lot of recurring cash flow from cable subscribers. They are seeing significant interest with respect to their digital cable and cable modems, as a growth area. We’re also seeing significant debt reduction with those companies that are improving their credit profile.

One sector that has kind of hairy fundamentals but really provides the best relative value and the widest spreads is the auto sector. The auto industry faces a number of challenges, and they include tremendous excess capacity, under-funded pensions, and high fixed costs. However, we believe that you are compensated for that with respect to risk reward.

BE: What do you consider to be the best sectors on the equity side?
STEWART: When you look at the banking industry’s relative contribution to broader market segments, you’ve got a group that over the past 25 some odd years has had a compound average annual earnings growth of around 10%. Couple that with a dividend return of somewhere between 2.5% and 3.5%, you’re talking about [growth of] anywhere from 10% to maybe 14%. Yet and still, if you look at the degree of investor participation within that sector, it is, for the most part, low. It’s not a high-tech industry. It’s a basic, boring, stable industry.

ELEY: The industry sectors we are finding the most values in right now are utilities, industrials, and materials. [These sectors] have a higher than normal dividend yield with utilities yielding right now about 3.1% [compared] to the roughly 1.7% yield of the S&P 500. That provides for great safety in a slow-growth environment that may include another recession in the next