Wealth: How The Pros See Our Economic Future

WHAT TO BUY, SELL AND HOLD IN 2010
How the pros see the future of the economy – advice from experts at Rockefeller, PNC,
Morgan Stanley, Wells Fargo, Wilmington Trust, Brown Advisory, Chevy Chase trust for
thriving and Surviving In the toughest economy since the Great Depression.
Concerned investors need to know how to deal with the ups and downs
of a volatile economic climate and Washington Life’s 2010 Wealth and Financial
Roundtable is where you’ll get access to the same advice they offer their wealthiest and
most successful clients. The Carlyle Group’s moderates a panel discussion
that encompasses a broad and diverse strategy. Should you buy bonds right now?. What
about blue chips? How much should you have in gold? Is real estate coming back? Read
below for the answers to these questions plus tips on many other areas of potential concern,
including personal liquidity strategy, inflation, sovereign risk, and hot growth sectors such as
healthcare, the environment, and emerging markets in Brazil, India, and China.
TAYLOR SWIFT: Hypothetical Investor
MR. EDWARD J. MATHIAS: If Taylor Swift, the country singer, came in to your office with
$25 million to invest how would you advise her in the current economic climate?
MR. : First we would look at who Taylor is. She earns her living from her
‘vocal’ capital. Knowing that there is probably $250 million of future investment capital in
addition to the current $25 million would help inform the asset allocation decisions between
stocks, bonds, hard assets, and alternative investments.
MR. CHRISTOPHER SARGENT: You would have to understand Taylor Swift’s total financial
situation and her comfort level with various investment possibilities. If she has the same
sentiments of many investors today who are very much afraid–with gold going up and
stocks going down, and bonds not necessarily the place to be–we would tread carefully.
It is a great time to buy blue chips, and so I would start with averaging some blue chips.
To hedge against geopolitical disasters, or terrorist attacks, or the great unknown, we
would also add some gold, and perhaps silver. I would pick some assets that did not
correlate with the stock markets, but steer away from bonds as it may be a terrible time
to buy them. All this printed money[from TARP and the federal stimulus] may come
back to haunt us.
MR. STEVE COMISKEY: First I would call my two sons at the Naval Academy, who are huge
fans of Taylor Swift. I would look at her as a young woman who hit the jackpot, and needs
to protect as much of her money as soon as possible. I would not look at her as a long-term
$250 million asset. I would put together a very conservative portfolio for her, and make sure
that she understood that her future revenue stream from music is not guaranteed, but rather
is very precarious.
MR. : One really has to think hard about inflation to build a portfolio that
can protect the value of those assets. So, I’d think about opportunities in small-cap growth
stocks, real estate, and some commodities, as hedges against inflation.
MR. : The process of uncovering what her particular needs are will
be paramount to the asset allocation discussion. I wouldn’t presume that it is going to be
aggressive or conservative.
CURRENT ECONOMIC OUTLOOK
MR. MATHIAS: A year ago it looked like the world was going off a cliff, and people were
extraordinarily fearful. What are the primary concerns that your clients have today as they
recalibrate their portfolios?
MR. HANKIN: Most clients realize that it might not be as scary as it was in the fall of 2008,
but it is just as challenging. The primary focus is making sure clients have enough liquidity
to survive a sustained tough period. Most clients are focused on the spectre of inflation.
But the strategies to address the concerns of liquidity and inflation can be in conflict with
one another.
MR. THORMAHLEN: Today, our clients want to know, “How can you protect me against
inflation?” and, “How can you protect my  wealth so that I can efficiently transfer it
to the next generation?” Our clients wantmore protection and a sense that you will
communicate.
MR. COMISKEY: Right now our high-net-worth families want capital preservation first and then
growth. They want to be able to meet their liquidity needs with no surprises.
MR. MATHIAS: There seems to be general agreement that inflation is a potential issue.
MR. SARGENT: Gold is not only a great defense against inflation, it has many utilizations. I tend
to use index funds, particularly for gold and silver, e.g. “the Spider Gold Trust.” Certain
people around the world now are looking at gold as the only sacred source of “permanent”
wealth.
In India, and in China, people are buying gold. Central Banks are also buying gold. There
is more demand now than ever. Furthermore, if the tensions in the Middle East broke out,
especially if Israel attacked Iran, gold would be a commodity to own.
MR. MATHIAS: What percentage would you recommend a person of substantial wealth
to have in gold?
MR. SARGENT: Anywhere from five to ten percent. For now, we are building our small
exposure in gold and silver. Currently, silver is very inexpensive in relation to gold, and
with its wide range of uses, particularly in cell phones and circuit boards, silver appears to be
a good buy.
MR. COMISKEY: I don’t see inflation as being an immediate problem. The possibility of
deflation concerns me. But to deal with U.S. inflation, we look for non-correlating
asset classes, and we usually try to include some emerging markets and commodities.
For example, some of the specialized emerging markets exchange-traded funds
[ETFs] track small and mid-cap companies in emerging markets. So we get a currency and
a commodity play not correlated to the value of the U.S. dollar.
MR. SARGENT: We invest in commodity index funds and we also use REITS [Real Estate
Investment Trusts] as inflation hedges.
MR. MATHIAS: I think the spectre of inflation is fortified by the deficits, and a lot of things
are related to the deficits. One is taxes. Where is tax policy likely to go?
MR. WELBER: I think everybody believes that taxes are going to increase. Most of our
clients are taxable, so we manage portfolios for tax-efficiency. Today, more than inflation,
the overriding worry is volatility. We counsel clients not to follow their worst fears and exit
at market bottoms.
MR. MATHIAS: Liquidity also seems to be of tremendous interest today.
MR. HANKIN: Our biggest concern has been making sure that clients first had a financial
allocation before an investment asset allocation, and by that we mean, “Let’s set aside the
amount of liquidity that you need to run your life and run your business for the next three
years.” Then we apply your investment asset allocation to the rest.
MR. MATHIAS: How do you get your clients international exposure?
MR. THORMAHLEN: We are cur rently recommending an allocation of about 20
percent to international, but that can work out to be actually higher as you add in a
Coca-Cola, or a McDonalds, or an IBM, i.e. companies that conduct their business globally.
For a growth orientation, we suggest an 80-20 mix of stocks to bonds, and out of that 80
percent, a 20 percent equity allocation towards international. We predominantly use either
ETFs, country funds, or international fund managers, but we also choose some individual
stocks when we have a high degree of comfort based on our own research.
MR. SARGENT: One has to diversify outside of the U.S. I have always been an advocate
of emerging markets; 450 million Indians and Chinese will become middle-class over
the next 10 years. The world’s population is going to double over the next 30 years.
Emerging markets are the fastest growing areas in the world and are often rich in
natural resources. However, when a sector like emerging markets beats every other
sector hands down, normally within a few years that segment will fall to the bottom. I
must admit that I am a little cautious about emerging markets and international equities
under the current circumstances.
MR. THORMAHLEN: The allocation to emerging markets might be only 5% of that 20%
allocation to international that I mentioned earlier. We are really looking at high-quality
companies in stable economies.
MR. MATHIAS: One of the ‘emerged’ markets everyone is interested in is China. How do
you get exposure there?
MR. COMISKEY: China is an important piece of many of our portfolios. China is expecting
an 8 to 10 percent increase in GDP this year, just like last year. China believes it needs the
8 percent in order to keep the middle-class comfortable, and for the lower-class to feel like
they can move into the middle-class. Brazil is a also a fantastic country to watch. It is perhaps
one of the most developed of the developing markets.
MR. SARGENT: I am a great believer in blue chip US companies like Mead Johnson where over
50% of their sales are to developing countries.
MR. WELBER: People don’t realize yet that there is a KFC, Dunkin’ Donuts and Pizza Hut
on almost every block in every city in China. So there are lots of ways to get exposure to
China. The fifth largest city in China [Tianjin] is now larger than New York City. A
little known fact is that for the first time in the world’s history, more than
50 percent of the world’s population now lives in cities. So, for example,
to get urban exposure to China and other developing markets, we are buying a
European company that is the second largest manufacturer of elevators, because living is
going to get vertical.
THE DOLLAR
MR. MATHIAS: Several months ago, investors were really concerned about the value of the dollar,
yet today it looks like a little less of a problem. But long term is there a way to hedge?
MR. WELBER: The best hedges against the dollar right now are foreign bonds, commodities,
gold, precious and base metals.
MR. MATHIAS: But to some extent these things are also your traditional inflation hedges, too,
so you get a double win.
MR. SARGENT: Everybody’s been beating up on the dollar for a long time, and look at what
has happened in the last 30 days.
MR. HANKIN: Today markets are cratering because of concern over the Euro and the European
Commission, not the dollar.
MR. COMISKEY: As much as I believe in investing in international asset classes, it is
the continuing strength of the U.S. that will preserve our clients’ wealth.
NEW PRODUCTS AND OPPORTUNITIES
MR. MATHIAS: Brown Advisory has acquired a company that runs environmental portfolios,
and has also come up with a fund to buy small pieces of private companies.
MR. HANKIN: For inflation reasons, we acquired Winslow, a Boston-based investment firm,
which has been investing in the green area for a long time. has run
Winslow since 1983, and has made money in this area. One of the great hedges against
inflation is to buy great, small emerging companies – look at Wal-Mart in the ‘70s.
We were interested primarily because we understood that a lot of money would flow
into this space to address the challenges of climate change.
The second idea grew from the fact that not a lot of companies have gone public the
last few years. A lot of companies are waiting for a liquidity event. We put together a team
to buy small slices of [private] equity, and wait until a liquidity event occurs. We’re able
to buy at a big discount because these folks have been illiquid for a long time.
MR. MATHIAS: There are always new things happening in the financial business. A few years
ago, we had not heard of exchange-traded funds or target-date funds.
MR. COMISKEY: One thing we haven’t talked about is hedge funds. Morgan Stanley has
set up “Front Point,” a hedge fund-of-funds, that has acquired approximately ten or so
boutique-type hedge funds, each in unique investment categories. Morgan Stanley
does all the back-office aspects such as compliance, legal, reporting, custody, etc,
and the underlying fund managers can then concentrate on what they do best—investing.
The beauty of this arrangement, from a client’s perspective, is that Morgan Stanley
can see on a daily basis exactly what is going on in every one of the underlying funds.
There is total transparency.
MR. SARGENT: One idea that people are not really focusing on is closed-end funds. They
were the market darling for the retail investor 10 or 15 years ago, and they really have been
forgotten. You can find well-managed funds trading at big discounts to net asset value that
also pay income. If you can buy a closed-end trust selling at 10 to 20 percent discounts to
actual value, it makes sense to me.
MR. THORMAHLEN: There is now a fund-offunds in this sector that yields 6 or 7 percent
(symbol: PCEF) that provides an opportunity to buy into closed-end funds.
MR. SARGENT: There is another fund-of-funds called the Cohen and Steers Closed-End
Opportunity Fund. And that fund is trading at a discount, and the investments inside the fund
are trade at discounts. So you get it both ways, with an 8% plus yield as icing on the cake.
MR. THORMAHLEN: We still feel strongly about the technology and the environment sector.
Small cap is a great idea, and after what we went through in 2008 you can now identify
the ones that have clean balance sheets and can survive. If you find a small cap
company with a clean balance sheet, great management, and a good product line, I think
that is the place to be.
MR. WELBER: We have been and continue to be significantly over-weighted in energy, with a
heavy concentration in Canada. In the U.S. we invest in pipeline companies, which are like
toll-takers for energy demand and distribution, regardless of the price of the underlying energy
or fuel.
MR. COMISKEY: Our managers focus on individual stock selection. They want
companies that have strong balance sheets, positive free cashflow, and defensible
operating margins. They are looking at the company itself, and not necessarily what
sector it’s in or where it is located.
MR. HANKIN: I would look at health care in addition to the environmental and
telecommunications sectors. In health care, there is a lot of capital available for new
technology.
MR. THORMAHLEN: It’s interesting that nobody here at the table talked about financial
services as an area in which they were concentrated.
MR. COMISKEY: The three biggest concerns that I have are: what are the consequences
of re-regulation? What are the consequences of inflation in China? And what is going to
happen in Europe?
GOVERNMENT INTERVENTION
MR. MATHIAS: Washington is now the financial capital of the world. We have replaced New
York. We have had government intervention in autos, health care, banking, insurance,
real estate etc. What are the long-term implications of that?
MR. SARGENT: To me, increased regulation means an increased number of regulators, which
means a bigger government.
MR. WELBER: It threatens the productivity and competitiveness of this country. The newest
risk on everybody’s mind is sovereign risk, whether it is Greece, Spain, or the U.S.
Governments have the capacity to harm their own currency and capital structure.
MR. MATHIAS: The real question is whether the U.S. is taking the path of Europe.
MR. HANKIN: I view government intervention as healthy when it sets ground rules that
people can understand so that exchanges operate fairly. It’s not constructive when it
tells people what to do with their money. But we do need government intervention to
avoid, e.g, a thousand-point drop sparked by computer error.
MR. COMISKEY: If you look the Greek crisis, the question is whether it is going to be the trigger
that pulls Europe apart.
MR. MATHIAS: The real problem with Greece is the exposure of the banks. Greece is really
immaterial otherwise.
But here, there is considerable concern about transparency, over-the-counter
derivatives, mortgage-backed securities, computerized trading
and other systemic risks to the market. Do you have specific suggestions with respect to
regulations in these areas?
MR. SARGENT: Transparency is terribly important in whatever we do. We
need to bring things out of the dark so that the public can see what is going on.
MR. MATHIAS: Somebody has to make the point that there is a populist backlash that
is inevitable now.
MR. HANKIN: We will survive the populist backlash. Long term, the regulations have to
be focused on transparency, and then let the investors make up their mind where they want
to invest.
MR. WELBER: We are not looking forward at ways to constrain and solve the problems
likely to occur in the future. An example is that everybody thinks that ETFs are easy
and accessible, and simple. Most ETFs are based on some form of derivative, and
have counter-party risks to firms like Bear Stearns or Lehman. Regulators don’t appear
to be thinking enough about where the next catastrophe or crisis is going to occur.
MR. MATHIS: We are preparing for the last war, as opposed to the next war.
MR. THORMAHLEN: We tend to talk about the environment when it is expedient, such as
when we have an oil spill. We spend too little time talking about investment opportunities
in this area.
MR. MATHIAS: Do any of you have concerns about the size of financial institutions, or the
notion of “too big to fail”?
MR. THORMAHLEN: If you look at what the government has made on TARP, they didn’t
lose any money. They invested in these “too big to fail” companies, the Citibanks,
the Bank of Americas, the Goldmans, and others, and at the end of the day the federal
government will garner a return that is quite good.
MR. HANKIN: I think we demonstrated that no institution is too big to fail.
RISKS FOR U.S. GOVERNMENT BONDS
MR. MATHIAS: There seems to be a strong consensus that the longer-term outlook for
U.S. treasury bonds is negative. What are your thoughts?
MR. SARGENT: It is good to err on the side of caution, but we are experiencing deflation,
not inflation.
MR. MATHIAS: Investors aren’t making much for taking bond risk anyway. The 5-year treasury is
only 2.2 percent. From today’s valuation what is a reasonable return expectation for the stock
market?
MR. HANKIN: Six percent.
MR. COMISKEY: Six to eight percent.
MR. THORMAHLEN: I would agree.
MR. SARGENT: Ten percent.
REAL ESTATE
MR. MATHIAS: Always of interest to readers is Washington real estate, particularly housing
prices. Do you have any sense of where that is going?
MR. COMISKEY: The neighborhoods in Northwest D.C. are stable. Even as you get a bit further out
of the city to places like Montgomery County, Fairfax County, Alexandria and Arlington, for
the most part they are stable.
MR. MATHIAS: There does seem to be a tremendous desire to move in closer to the city.
MR. THORMAHLEN: If you look at our market and the geographic region, job growth is going
to be much better than the national average. So across the board, the real estate market
should stabilize even more. Lockheed Martin is going to move their headquarters here.
More and more companies are looking to see what business they can do with Washington.
For example, PNC, just celebrated its fifth anniversary in Washington. Now the Greater
Washington Area is one of the best growth markets for PNC. By our measures, it will only
get better.
MR. WELBER: As long as people are buying homes and not houses, and as long as they
are not buying houses for a speculative investment, we are going to be fine.
MR. SARGENT: The local real estate markets didn’t come down as much as other areas; there is still
a glut, but it is basically stabilizing. There are also a lot of international people moving to
Washington.
PHILANTHROPY
MR. MATHIAS: Historically Washington has been one of the most philanthropic cities in the
world. Have you seen any change in that on the part of your clients as a result of the
economy?
MR. THORMAHLEN: We do a wealth and value survey every year, and found that more people
are concerned about leaving a legacy, either through philanthropic means, or teaching their
children how to be philanthropic.
MR. HANKIN: Corporate donors have really declined, but it is impressive to see
individuals step up to the plate.
MR. SARGENT: With charitable organizations under stress from decreased donations, I see
individuals trying to contribute more, and that is a good sign.
MR. COMISKEY: The best example I can give is Venture Philanthropy Partners (VPP), formed
by , and former Governor and Senator , , and
. The simple answer to your question is that people want the comfort that
their donated money is being used wisely. VPP meets that test better than anything
else that I know.

How the pros see the future of the economy – advice from experts at Rockefeller, PNC, Morgan Stanley, Wells Fargo, Wilmington Trust, Brown Advisory, Chevy Chase trust for thriving and surviving In the toughest economy since the Great Depression.

Compiled by William Batts, Kevin Chaffee, and Soroush Shehabi

Ed Mathias

Ed Mathias

Concerned investors need to know how to deal with the ups and downs of a volatile economic climate and Washington Life’s 2010 Wealth and Financial Roundtable is where you’ll get access to the same advice they offer their wealthiest and most successful clients. The Carlyle Group’s Ed Mathias moderates a panel discussion that encompasses a broad and diverse strategy. Should you buy bonds right now?. What about blue chips? How much should you have in gold? Is real estate coming back? Read below for the answers to these questions plus tips on many other areas of potential concern, including personal liquidity strategy, inflation, sovereign risk, and hot growth sectors such as healthcare, the environment, and emerging markets in Brazil, India, and China.

WL’S EXPERT PANEL

Edward J. Mathias

Edward J. Mathias

Moderator Edward J. Mathias is a managing director of the Carlyle Group and graduated with an M.B.A. from Harvard Business School. He is also cochairman of the President’s Circle of the National Gallery of Art.

Michael D. Hankin

Michael D. Hankin

Michael D. Hankin, president and CEO of Brown Advisory Holdings Inc, has spent over 20 years assisting a wide range of

individuals and institutions striving to meet their investment and financial goals. He was formerly a partner with the Baltimore,

Md., law firm of Piper & Marbury Hankin serves as president of the Land Preservation Trust and as a trustee of John Hopkins

Medicine and the Baltimore Community Foundation.

Stephen Comiskey

Stephen Comiskey

Steve Comiskey leads the Comiskey Group at Morgan Stanley Smith Barney, where he helps wealth creators and their

families protect and grow their assets. He has his Investment Management Analyst certification from the Wharton School

at the University of Pennsylvania, a J.D. from the Washington College of Law at American University, and a B.S. and Marine

Corps officer commission from the U.S. Naval Academy.

Christopher S. Sargent, a sixth-generation Washingtonian, is managing director and senior financial advisors at The Sargent

Group of Wachovia Securities where he manages approximately $1 billion. He began his career in the Washington, D.C., branch of

Auchincloss, Parker and Redpath in 1966. He has been recognized as one of the “Top 100 Financial Advisors in the U.S.” by Barron’s

Magazine in 2006 and 2007.

Stephen C. Thormahlen

Stephen C. Thormahlen

Stephen C. Thormahlen is the managing director for PNC Bank’s wealth management division in

Washington where he supervises three teams of professional advisors, 54 staff members and 4 offices in Virginia, Maryland

and the Washington, DC regional market. He is responsible for all aspects of the investment management and banking experience

for high net worth clients of PNC Bank.

Peter Welber

Peter Welber

Peter Welber is president, CEO, and board director of Chevy Chase Trust Company, a privately-owned, Washington-based

wealth management firm focusing on customized investments and financial planning for high net worth individuals and families. He

also is CEO of ASB Capital Management. Previously Mr. Welber was president of Wachovia Trust Company and First Union Trust Company in Charlotte, N.C.

TAYLOR SWIFT: Hypothetical Investor

Mr. Edward J. Mathias: If Taylor Swift, the country singer, came in to your office with $25 million to invest how would you advise her in the current economic climate?

Mr. Peter M. Welber: First we would look at who Taylor is. She earns her living from her ‘vocal’ capital. Knowing that there is probably $250 million of future investment capital in addition to the current $25 million would help inform the asset allocation decisions between stocks, bonds, hard assets, and alternative investments.

Mr. Christopher Sargent: You would have to understand Taylor Swift’s total financial situation and her comfort level with various investment possibilities. If she has the same sentiments of many investors today who are very much afraid–with gold going up and stocks going down, and bonds not necessarily the place to be–we would tread carefully. It is a great time to buy blue chips, and so I would start with averaging some blue chips. To hedge against geopolitical disasters, or terrorist attacks, or the great unknown, we would also add some gold, and perhaps silver. I would pick some assets that did not correlate with the stock markets, but steer away from bonds as it may be a terrible time to buy them. All this printed money[from TARP and the federal stimulus] may come back to haunt us.

Mr. Steve Comiskey: First I would call my two sons at the Naval Academy, who are huge fans of Taylor Swift. I would look at her as a young woman who hit the jackpot, and needs  to protect as much of her money as soon as possible. I would not look at her as a long-term $250 million asset. I would put together a very conservative portfolio for her, and make sure that she understood that her future revenue stream from music is not guaranteed, but rather is very precarious.

Mr. Michael D. Hankin: One really has to think hard about inflation to build a portfolio that can protect the value of those assets. So, I’d think about opportunities in small-cap growth stocks, real estate, and some commodities, as hedges against inflation.

Mr. Stephen C. Thormahlen: The process of uncovering what her particular needs are will be paramount to the asset allocation discussion. I wouldn’t presume that it is going to be aggressive or conservative.

CURRENT ECONOMIC OUTLOOK

Mr. Mathias: A year ago it looked like the world was going off a cliff, and people were extraordinarily fearful. What are the primary concerns that your clients have today as they recalibrate their portfolios?

Mr. Hankin: Most clients realize that it might not be as scary as it was in the fall of 2008, but it is just as challenging. The primary focus is making sure clients have enough liquidity to survive a sustained tough period. Most clients are focused on the spectre of inflation. But the strategies to address the concerns of liquidity and inflation can be in conflict with one another.

Mr. Thormahlen: Today, our clients want to know, “How can you protect me against inflation?” and, “How can you protect my  wealth so that I can efficiently transfer it to the next generation?” Our clients wantmore protection and a sense that you will communicate.

Mr. Comiskey: Right now our high-net-worth families want capital preservation first and then growth. They want to be able to meet their liquidity needs with no surprises.

MR. MATHIAS: There seems to be general agreement that inflation is a potential issue.

MR. SARGENT: Gold is not only a great defense against inflation, it has many utilizations. I tend  to use index funds, particularly for gold and silver, e.g. “the Spider Gold Trust.” Certain people around the world now are looking at gold as the only sacred source of “permanent” wealth.

In India, and in China, people are buying gold. Central Banks are also buying gold. There is more demand now than ever. Furthermore, if the tensions in the Middle East broke out, especially if Israel attacked Iran, gold would be a commodity to own.

Mr. Mathias: What percentage would you recommend a person of substantial wealth to have in gold?

Mr. Sargent: Anywhere from five to ten percent. For now, we are building our small exposure in gold and silver. Currently, silver is very inexpensive in relation to gold, and with its wide range of uses, particularly in cell phones and circuit boards, silver appears to be a good buy.

Mr. Comiskey: I don’t see inflation as being an immediate problem. The possibility of deflation concerns me. But to deal with U.S. inflation, we look for non-correlating asset classes, and we usually try to include some emerging markets and commodities. For example, some of the specialized emerging markets exchange-traded funds [ETFs] track small and mid-cap companies in emerging markets. So we get a currency and a commodity play not correlated to the value of the U.S. dollar.

Mr. Sargent: We invest in commodity index funds and we also use REITS [Real Estate Investment Trusts] as inflation hedges.

Mr. Mathias: I think the spectre of inflation is fortified by the deficits, and a lot of things are related to the deficits. One is taxes. Where is tax policy likely to go?

Mr. Welber: I think everybody believes that taxes are going to increase. Most of our clients are taxable, so we manage portfolios for tax-efficiency. Today, more than inflation, the overriding worry is volatility. We counsel clients not to follow their worst fears and exit at market bottoms.

Mr. Mathias: Liquidity also seems to be of tremendous interest today.

Mr. Hankin: Our biggest concern has been making sure that clients first had a financial allocation before an investment asset allocation, and by that we mean, “Let’s set aside the amount of liquidity that you need to run your life and run your business for the next three years.” Then we apply your investment asset allocation to the rest.

Mr. Mathias: How do you get your clients international exposure?

Mr. Thormahlen: We are cur rently recommending an allocation of about 20 percent to international, but that can work out to be actually higher as you add in a Coca-Cola, or a McDonalds, or an IBM, i.e. companies that conduct their business globally. For a growth orientation, we suggest an 80-20 mix of stocks to bonds, and out of that 80 percent, a 20 percent equity allocation towards international. We predominantly use either ETFs, country funds, or international fund managers, but we also choose some individual stocks when we have a high degree of comfort based on our own research.

Mr. Sargent: One has to diversify outside of the U.S. I have always been an advocate of emerging markets; 450 million Indians and Chinese will become middle-class over the next 10 years. The world’s population is going to double over the next 30 years. Emerging markets are the fastest growing areas in the world and are often rich in natural resources. However, when a sector like emerging markets beats every other sector hands down, normally within a few years that segment will fall to the bottom. I must admit that I am a little cautious about emerging markets and international equities under the current circumstances.

Mr. Thormahlen: The allocation to emerging markets might be only 5% of that 20% allocation to international that I mentioned earlier. We are really looking at high-quality companies in stable economies.

Mr. Mathias: One of the ‘emerged’ markets everyone is interested in is China. How do you get exposure there?

Mr. Comiskey: China is an important piece of many of our portfolios. China is expecting an 8 to 10 percent increase in GDP this year, just like last year. China believes it needs the 8 percent in order to keep the middle-class comfortable, and for the lower-class to feel like they can move into the middle-class. Brazil is a also a fantastic country to watch. It is perhaps one of the most developed of the developing markets.

Mr. Sargent: I am a great believer in blue chip US companies like Mead Johnson where over 50% of their sales are to developing countries.

Mr. Welber: People don’t realize yet that there is a KFC, Dunkin’ Donuts and Pizza Hut on almost every block in every city in China. So there are lots of ways to get exposure to China. The fifth largest city in China [Tianjin] is now larger than New York City. A little known fact is that for the first time in the world’s history, more than 50 percent of the world’s population now lives in cities. So, for example, to get urban exposure to China and other developing markets, we are buying a European company that is the second largest manufacturer of elevators, because living is going to get vertical.

THE DOLLAR

Mr. Mathias: Several months ago, investors were really concerned about the value of the dollar, yet today it looks like a little less of a problem. But long term is there a way to hedge?

Mr. Welber: The best hedges against the dollar right now are foreign bonds, commodities, gold, precious and base metals.

Mr. Mathias: But to some extent these things are also your traditional inflation hedges, too, so you get a double win.

Mr. Sargent: Everybody’s been beating up on the dollar for a long time, and look at what has happened in the last 30 days.

Mr. Hankin: Today markets are cratering because of concern over the Euro and the European Commission, not the dollar.

Mr. Comiskey: As much as I believe in investing in international asset classes, it is the continuing strength of the U.S. that will preserve our clients’ wealth.

NEW PRODUCTS AND OPPORTUNITIES

Mr. Mathias: Brown Advisory has acquired a company that runs environmental portfolios, and has also come up with a fund to buy small pieces of private companies.

Mr. Hankin: For inflation reasons, we acquired Winslow, a Boston-based investment firm, which has been investing in the green area for a long time. Jack Robinson has run Winslow since 1983, and has made money in this area. One of the great hedges against inflation is to buy great, small emerging companies – look at Wal-Mart in the ‘70s. We were interested primarily because we understood that a lot of money would flow into this space to address the challenges of climate change.

The second idea grew from the fact that not a lot of companies have gone public the last few years. A lot of companies are waiting for a liquidity event. We put together a team to buy small slices of [private] equity, and wait until a liquidity event occurs. We’re able to buy at a big discount because these folks have been illiquid for a long time.

Mr. Mathias: There are always new things happening in the financial business. A few years ago, we had not heard of exchange-traded funds or target-date funds.

Mr. Comiskey: One thing we haven’t talked about is hedge funds. Morgan Stanley has set up “Front Point,” a hedge fund-of-funds, that has acquired approximately ten or so boutique-type hedge funds, each in unique investment categories. Morgan Stanley does all the back-office aspects such as compliance, legal, reporting, custody, etc, and the underlying fund managers can then concentrate on what they do best—investing. The beauty of this arrangement, from a client’s perspective, is that Morgan Stanley can see on a daily basis exactly what is going on in every one of the underlying funds. There is total transparency.

Mr. Sargent: One idea that people are not really focusing on is closed-end funds. They were the market darling for the retail investor 10 or 15 years ago, and they really have been forgotten. You can find well-managed funds trading at big discounts to net asset value that also pay income. If you can buy a closed-end trust selling at 10 to 20 percent discounts to actual value, it makes sense to me.

Mr. Thormahlen: There is now a fund-offunds in this sector that yields 6 or 7 percent (symbol: PCEF) that provides an opportunity to buy into closed-end funds.

Mr. Sargent: There is another fund-of-funds called the Cohen and Steers Closed-End Opportunity Fund. And that fund is trading at a discount, and the investments inside the fund are trade at discounts. So you get it both ways, with an 8% plus yield as icing on the cake.

Mr. Thormahlen: We still feel strongly about the technology and the environment sector. Small cap is a great idea, and after what we went through in 2008 you can now identify the ones that have clean balance sheets and can survive. If you find a small cap company with a clean balance sheet, great management, and a good product line, I think that is the place to be.

Mr. Welber: We have been and continue to be significantly over-weighted in energy, with a heavy concentration in Canada. In the U.S. we invest in pipeline companies, which are like toll-takers for energy demand and distribution, regardless of the price of the underlying energy or fuel.

Mr. Comiskey: Our managers focus on individual stock selection. They want companies that have strong balance sheets, positive free cashflow, and defensible operating margins. They are looking at the company itself, and not necessarily what sector it’s in or where it is located.

Mr. Hankin: I would look at health care in addition to the environmental and telecommunications sectors. In health care, there is a lot of capital available for new technology.

Mr. Thormahlen: It’s interesting that nobody here at the table talked about financial services as an area in which they were concentrated.

Mr. Comiskey: The three biggest concerns that I have are: what are the consequences of re-regulation? What are the consequences of inflation in China? And what is going to happen in Europe?

GOVERNMENT INTERVENTION

Mr. Mathias: Washington is now the financial capital of the world. We have replaced New York. We have had government intervention in autos, health care, banking, insurance, real estate etc. What are the long-term implications of that?

Mr. Sargent: To me, increased regulation means an increased number of regulators, which means a bigger government.

Mr. Welber: It threatens the productivity and competitiveness of this country. The newest risk on everybody’s mind is sovereign risk, whether it is Greece, Spain, or the U.S. Governments have the capacity to harm their own currency and capital structure.

Mr. Mathias: The real question is whether the U.S. is taking the path of Europe.

Mr. Hankin: I view government intervention as healthy when it sets ground rules that people can understand so that exchanges operate fairly. It’s not constructive when it tells people what to do with their money. But we do need government intervention to avoid, e.g, a thousand-point drop sparked by computer error.

Mr. Comiskey: If you look the Greek crisis, the question is whether it is going to be the trigger that pulls Europe apart.

Mr. Mathias: The real problem with Greece is the exposure of the banks. Greece is really immaterial otherwise. But here, there is considerable concern about transparency, over-the-counter derivatives, mortgage-backed securities, computerized trading and other systemic risks to the market. Do you have specific suggestions with respect to regulations in these areas?

Mr. Sargent: Transparency is terribly important in whatever we do. We need to bring things out of the dark so that the public can see what is going on.

Mr. Mathias: Somebody has to make the point that there is a populist backlash that is inevitable now.

Mr. Hankin: We will survive the populist backlash. Long term, the regulations have to be focused on transparency, and then let the investors make up their mind where they want to invest.

Mr. Welber: We are not looking forward at ways to constrain and solve the problems likely to occur in the future. An example is that everybody thinks that ETFs are easy and accessible, and simple. Most ETFs are based on some form of derivative, and have counter-party risks to firms like Bear Stearns or Lehman. Regulators don’t appear to be thinking enough about where the next catastrophe or crisis is going to occur.

Mr. Mathias: We are preparing for the last war, as opposed to the next war.

Mr. Thormahlen: We tend to talk about the environment when it is expedient, such as when we have an oil spill. We spend too little time talking about investment opportunities in this area.

Mr. Mathias: Do any of you have concerns about the size of financial institutions, or the notion of “too big to fail”?

Mr. Thormahlen: If you look at what the government has made on TARP, they didn’t lose any money. They invested in these “too big to fail” companies, the Citibanks, the Bank of Americas, the Goldmans, and others, and at the end of the day the federal government will garner a return that is quite good.

Mr. Hankin: I think we demonstrated that no institution is too big to fail.

RISKS FOR U.S. GOVERNMENT BONDS

Mr. Mathias: There seems to be a strong consensus that the longer-term outlook for U.S. treasury bonds is negative. What are your thoughts?

Mr. Sargent: It is good to err on the side of caution, but we are experiencing deflation, not inflation.

Mr. Mathias: Investors aren’t making much for taking bond risk anyway. The 5-year treasury is only 2.2 percent. From today’s valuation what is a reasonable return expectation for the stock market?

Mr. Hankin: Six percent.

Mr. Comiskey: Six to eight percent.

Mr. Thormahlen: I would agree.

Mr. Sargent: Ten percent.

REAL ESTATE

Mr. Mathias: Always of interest to readers is Washington real estate, particularly housing prices. Do you have any sense of where that is going?

Mr. Comiskey: The neighborhoods in Northwest D.C. are stable. Even as you get a bit further out of the city to places like Montgomery County, Fairfax County, Alexandria and Arlington, for the most part they are stable.

Mr. Mathias: There does seem to be a tremendous desire to move in closer to the city.

Mr. Thormahlen: If you look at our market and the geographic region, job growth is going to be much better than the national average. So across the board, the real estate market should stabilize even more. Lockheed Martin is going to move their headquarters here. More and more companies are looking to see what business they can do with Washington.

For example, PNC, just celebrated its fifth anniversary in Washington. Now the Greater Washington Area is one of the best growth markets for PNC. By our measures, it will only get better.

Mr. Welber: As long as people are buying homes and not houses, and as long as they are not buying houses for a speculative investment, we are going to be fine.

Mr. Sargent: The local real estate markets didn’t come down as much as other areas; there is still a glut, but it is basically stabilizing. There are also a lot of international people moving to Washington.

PHILANTHROPY

Mr. Mathias: Historically Washington has been one of the most philanthropic cities in the world. Have you seen any change in that on the part of your clients as a result of the economy?

Mr. Thormahlen: We do a wealth and value survey every year, and found that more people are concerned about leaving a legacy, either through philanthropic means, or teaching their children how to be philanthropic.

Mr. Hankin: Corporate donors have really declined, but it is impressive to see individuals step up to the plate.

Mr. Sargent: With charitable organizations under stress from decreased donations, I see individuals trying to contribute more, and that is a good sign.

Mr. Comiskey: The best example I can give is Venture Philanthropy Partners (VPP), formed by Mario Marino, and former Governor and Senator Mark Warner, Jack Davies, and Raul Fernandez. The simple answer to your question is that people want the comfort that their donated money is being used wisely. VPP meets that test better than anything else that I know.

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