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12/02/2011 7:00 am EST
The market has potential in the coming months, but continued caution is advised over the next few years, says asset manager Barry James. In today's interview, he tells MoneyShow.com about some of his stock picks, and discusses why he likes REITs from the commercial and industrial space.
Kate Stalter: Today's guest is Barry James. He's the President and CEO of James Investment Research.
Barry, you use a number of investment approaches for your client portfolios, but give us the 30,000-foot view of asset allocation in all this current market volatility.
Barry James: Well, that's a great point, and that's where probably 95% of people's return comes from, the asset allocation.
We just try to measure the risk levels that we see in various asset classes, if you will. Primarily international and US equities, and fixed income.
As we look at the world today, in the shorter term-the next two to six months-things actually look pretty favorable for both stocks and for bonds. So we're actually increasing from having very, very low levels of equities, up until a month or so ago, and we've been adding.
We're about 50/50 today between stocks and bonds, but as we look at the world, we know that there's a lot of troubles and they're not going away any time soon.
But the good news is, in the short run, we've had a nice pullback in stocks recently. What we try to look at are economic factors and sentiment factors and some technical items, and they're overwhelmingly positive, better than a three-to-one margin, the way that we look at things today, for the next couple of months.
So everyone's kind of down in the mouth, but Santa, we hope, will come to call.
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Kate Stalter: In looking at your Web site, I did happen to notice that you incorporate a number of different investment styles. You have here listed balanced, equity, market neutral-even getting into some of the capitalization, the market cap, when it comes to stocks. Tell us a little bit about how you decide what to allocate where.
Barry James: That's a very good question. In our balanced and equity portfolios, we're all-capitalization managers, meaning we have small-, mid-, and large-, and even some micro-cap stocks. Some of our styles are specific micro-cap, small-cap, mid-cap, and as we look at the world, we try to find where are the best opportunities given the amount of risk that you have in those particular sizes.
Generally speaking, being roughly a third, a third, a third, is a wise way to approach the markets, but if you do see the markets in a certain phase, if you will, of where's there's higher risks, then perhaps you'd want to be more in large-cap stocks.
And probably today, even though we might have this nice run over the next couple months, we're probably favoring large-caps more, because we think on the back side of that, we'll probably run into some more trouble. But in the long run, smaller-cap stocks do better than larger-cap stocks by about 4% a year.
Over the next ten years, we really see that small-cap stocks will probably be the all-stars, if you will. It will be stock selection; it just won't be by the class itself. But when you get into a period of just extended malaise, if you will, for the markets, small-caps tend to do well, as we saw back in the 70s when we really got started in this business.
Kate Stalter: Now, I was curious when you mentioned that large-caps tend to do better over time. Is that on a total return basis or simply price appreciation?
Barry James: Well, that is a total return, but that's in markets that are weak. Over the long, long term, going back to the 1920s, small-caps have done about 4% a year better, so they're a good bet. But the other side of that equation is when the markets go down, they tend to go down a lot further, as we've seen so far in 2011.
So while we're expecting there to be some rebound in stocks, maybe 10%, 15%, or so, we think that large-caps right now are probably the better place to be on the back side of that rally to preserve your capital.
Kate Stalter: Having said that, are there any investment ideas that you are putting your clients into now, that you believe other investors should take a look at as well?
Barry James: Well, there are. The finance sector is one of the sectors that we like, and it's not the big money-center banks. We think they still have enough problems from Europe and the housing problems and so forth. But a lot of the regional banks are actually showing up a lot better in the way that we look for stocks.
We look for companies that are relatively cheap compared to other companies, but their earnings are good and the price is in a pattern where it's stronger than the overall market. We're seeing that in some of the regional banks like Fifth Third Bank (FITB) or PNC Bank (PNC) or Key Bank (KEY).so again, kind of the regional level, not at the big money-center level.
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Another area that we like are some of the real estate investment trusts, specifically commercial and apartment real estate investment trusts. They do have decent yields on them, which is something that we think is very favorable.
But if we look at the world, they didn't get the "help" from Washington that the residential markets did. So, they went through their down cycle, and they're already rebounding. You're seeing vacancies fall and you're seeing rents rise, so those are a couple of the areas that we like at this time.
Kate Stalter: Any particular REITs that people might want to do some research into?
Barry James: Well, there's a couple that we like. Apartment REIT (AIV), Home Properties (HME), Post Properties (PPS). Those are all in the apartment area. First Industrial (FR), Boston Properties (BXP), Brookfield (BPO)-those would be three in the more industrial and commercial side of things.
Kate Stalter: Barry, what would be your advice overall for individual investors who are just trying to do their best to navigate these incredibly volatile markets, but it's just been incredibly frustrating. What would you suggest to people?
Barry James: Well, I would have a discipline in place for adjusting to what the market gives you. We don't think that over the next ten years, or maybe you can pull it back to five years, you're going to see a big bull market where you can just buy and hold. So that's not part of the paradigm that we think folks should go forth with.
They should use the volatility to their advantage. Buying some when stocks are down 10% or 15%, selling after they've gone up 10% or 15%. Not doing that with the whole portfolio-that kind of market timing just doesn't work-but you can add some value.
If you can't do that yourself, then look for a fund manager that would be active in their approach to investing and could possibly help adjust those risk levels up and down as the opportunities afford themselves.
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