We've made several changes in our model portfolio to increase our margin of safety amid the market v...
2 Breakout Areas To Watch
08/08/2011 7:00 am EST
Using quantitative analysis, Ernest Carrera has identified dividend-paying stocks and emerging-market funds as two areas of opportunity. He cautions retail investors to stay away from the US housing sector, as well as debt-ridden European nations.
Kate Stalter: We are speaking today with Ernest Carrera of JHS Capital Advisors in Tampa, Florida, and thank you so much for joining us today.
Ernest Carrera: Well thank you, Kate.
Kate Stalter: I wanted to start out asking you what I normally begin with in these interviews with: Your take on the current market conditions, and what you think individual investors need to know about. Of course, there has been a lot of selling and a lot of volatility, so give us some context on that and what we might expect.
Ernest Carrera: Okay, the information that I have derived my conclusions on are based through economic data that has been released through the second quarter of this year.
Basically, I have found that there are concerns in the economic growth of the US markets due to the debt situation that we are currently facing. Also, we are looking at developing countries not having enough growth to drive down unemployment, and concerns about rising inflation both domestically and in markets abroad.
Kate Stalter: Within all that then, what are some areas, maybe some sectors or geographical regions, where you believe there might be some pockets of strength at this moment?
Ernest Carrera: Well currently, a couple of opportunities that I find to be of particular interest are domestic stocks that are paying dividends. A lot of countries currently are carrying large amounts of money on their balance sheets, and typically value stocks or dividend-paying stocks have outperformed their other large-cap counterparts, with lower standard deviations and volatility.
Also, other areas that I find to be a somewhat attractive measure are some areas in the emerging markets. What I have found is that historically, if you take a look at the areas of international vs. US market share—let’s say compared from June 1, 2001 through June of 2011—the market share of international markets have grown considerably in relation to what they were just ten years back.
Also, when you take a look at the diversification or amount of growth in developed markets vs. emerging markets, the emerging-market share has also increased by sizable margins from where they were just ten years ago.
Kate Stalter: Any particular regions within the emerging nations that might be worth a special look?
Ernest Carrera: Hmm, well I typically use a diversified investment approach, and what I typically do is to hire institutional-type managers who have a number of analysts who are able to dissect those sectors on a more quantitative basis, in order to derive particular sectors or countries that I find have more opportunities.
Kate Stalter: Okay, what are some areas, Ernest, that you believe individual investors should be avoiding at this moment?
Ernest Carrera: Well, some of the weakest areas that I have found is in the housing markets. I think housing and real estate are something to be concerned about.
If you take a look at some of the economic data, the US housing recovery remains a drag. Basically it has continued to drag on US growth, both directly and via residential investment, and that has been holding down and is a drain on household confidence.
Given a more massive supply of homes on the markets over the number of homeowners that have gone underwater on their mortgages, that’s caused this to be a concerning sector.
Other areas of concern are foreign debt, particularly in countries such as Greece, Ireland, Portugal, Spain, and Italy. So those countries, in my opinion, should be avoided.
NEXT: Where to Invest|pagebreak|
Kate Stalter: What are some of the investment vehicles that you are using right now to meet your clients' objectives?
Ernest Carrera: Well again, from a diversification standpoint, depending on the risk and reward the clients are looking to attain: Opportunities I have found to be in dividend-paying stocks and emerging markets on the equity side.
On the taxable fixed-income side, areas such as emerging-market debt, high-yield and senior floating-rate funds.
Kate Stalter: Okay, I was just going to ask you, are there any particular funds or stocks that you might be able to mention that individuals should research right now, that might be worth a look?
Ernest Carrera: I basically use a quantitative analysis when selecting mutual funds, and we take a look at a manager’s tenure. I think it is important to make sure that if you can, go with an institutional manager. Find a manager whose tenure has been long enough to sustain the performance of either a separately managed account or its mutual-fund counterpart.
It also finds funds or SMAs that typically have lower standard deviations and higher correlation measurements. That will give them a good relative measure as far as the performance of the underlying fund, or separately managed accounts, as far as correlating with the benchmark that we are trying to outperform.
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