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03/29/2012 6:30 am EST
Large, dividend-paying equities are good portfolio additions in this low-interest-rate environment, says asset manager Chip Cobb. He also tells MoneyShow.com why he prefers individual muni bonds over a bond fund.
Kate Stalter: I’m speaking today with Chip Cobb of Bryn Mawr Trust.
Chip, one of the things obviously that’s on investors’ minds, with so much volatility in the market, are concerns about low interest rates and equity performance. What should people be doing right now, so they don’t risk having their nest egg evaporating again?
Chip Cobb: Yeah, we have a certainly challenging time. We’ve come from a very challenging time already, and we would argue that investors, certainly as they approach retirement or are in retirement, need to be much more balanced than they have in the past.
We believe that equities—which we understand, people are dramatically underweight at this point—need to increase their weighting. With the fixed-income markets as weak as they’ve been, not in terms of their performance but just terms of their yields, they need to have an outlet to actually try to achieve some greater yield, and we think equities are going to help support that.
But we certainly understand the volatility and recognize that people are very skittish, and that’s why we’ve seen so little money moved into the market. But they need to have a much more balanced portfolio than they’ve had in the past.
Kate Stalter: So, what’s a good way to go about that, or even to determine what a good asset mix might be right now?
Chip Cobb: Well, obviously the current risk environment, depending upon someone’s tax situation, we’re big proponents of municipal bonds, individual specifically.
We’re much more comfortable owning an individual position than owning a bond fund, primarily because of the fact that even though the Fed has told us that interest rates should be staying down here near zero for the next two to three years, we know that’s subject to change. But we truly believe that municipals, specifically, are a far better way to own the yield than Treasuries.
And most important is knowing that—nothing against a bond manager, because we know they’re doing the best job they possibly can—but you can all but guarantee, and I don’t like to use that word too lightly, that when interest rates do rise, we know it’ll happen at some point, those yields are going to move. And most importantly, those bond prices are going to come down.
Someone whose got a bond fund is certainly at risk going forward. So for fixed income, we like municipals, specifically individual positions, and we try to stay specific depending upon the type of portfolio we’re managing.
And then from an equity position, we’re much more comfortable owning the indexes, through a lot of the ETFs that we can find areas around the market that we feel comfortable with.
Kate Stalter: I want to follow up on what you just alluded to: The idea of some of these equities for yield. Can you say just a little bit more about that? Maybe, are there some particular sectors or areas that investors should be looking into?
Chip Cobb: Well, we definitely like technology, and we certainly recognize—even though there’s going to be a hot debate with the upcoming presidential election—knowing that there’s a chance, or at least certainly an issue with the change in health care. Some of the health-care areas we feel very comfortable with. There are a number of large-cap positions in each of those areas that we like.
Fundamentally, many of these companies are paying attractive dividends, as I alluded to earlier. Many of these are paying far more than what comparable corporate bonds are paying, and much of them are paying more than what the market is paying.
So just as a couple examples to look at, these are very large names that we all recognize, but fundamentally, they’re still very attractive based on where their earnings are, and more importantly, where their future earnings are. In technology, you can look at Microsoft (MSFT) or IBM (IBM), even Accenture (ACN) or ADP (ADP).
In the health-care space, you can look at United Health (UNH) or Merck (MRK) or Johnson & Johnson (JNJ). All have attractive yields. All are what we believe is undervalued as compared to their future earnings, so a couple of areas to look at there.
Kate Stalter: And Chip, last question, just to follow up on what you just said: If people are going into some of these dividend-paying blue chips, should they look at these as longer term, buy-and-hold type of investments, or should they be always monitoring for some kind of exit point?
Chip Cobb: Well, I think it’s a combination of both. First off, it’s always a monitoring situation. It’s always an area of, “What’s my entry point, vs. where the value of the position is.”
And certainly, had we bought these back in September of last year and looking at them now, they look you’ve had attractive gains, and you’re wondering, “Hey, have I gotten my full value out of this thing?” As opposed to buying them today, “Am I buying them here closer to their peaks?”
But the problem I think that we’ve all gravitated toward, in light of what the market’s done to us or for us in the last several years, we’ve all moved to a short-term focus. That’s unfortunate, because there’s only very, very few short-term traders out there that are successful.
Long-term investors are far more successful, if they have the time and the energy, and more importantly the risk tolerance, to wait these things out.
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