A Bird’s-Eye View of Investing in 2021

Jim Lowell:

Hello, this is Jim Lowell and I’m the chief investment officer at Adviser Investments, and I’m here with another The Adviser You Can Talk To Podcast. Today I’m joined by Dan Wiener, chairman of Adviser Investments, and today we’re going to invite you to join this conversation about our bird’s-eye view on investing in and through 2021. Dan and I are going to talk about some of the key issues and themes we think we’ll be managing through, many of which we managed throughout 2020.

Jim Lowell:

I also wanted to call attention to another podcast I’ll be hosting with our excellent investment research team, where several key members will drill down into their areas of expertise and discuss more specific risks and opportunities that they see. That podcast is forthcoming. In short, we’re not going to leave any stone unturned in what remains a topsy-turvy time to invest.

Jim Lowell:

Dan, speaking of topsy-turvy times, one thing that hasn’t gone away, and could become more contentious in the days ahead, is impeachment. It’s hard to recall, but that’s exactly where we began 2020, an impeachment process underway. And while we know that politics is a fevered subject, the markets seem to be discounting its impact. Why do you think that is?

Dan Wiener:

Well, I mean, for one thing, and thanks for having me here, Jim, it’s always fun. I think one thing the markets, or we should say traders, are looking at is the fact that the election is over. The real issues that we face today are the pandemic, getting the economy back on its feet, getting it moving, getting it growing again. The politics come and go, Republicans come into power, Democrats come into power, the bottom line is that stock prices move on the basis of how corporations do, how much they earn. Obviously, there’s a big impact from interest rates. Are interest rates high or are interest rates low? Luckily for all of us, politicians come and go, and so I think we are blessed that politics may have a short term impact on markets, but long term, they really can be ignored.

Dan Wiener:

We’ve done a lot of research on this, as I think you spearheaded some of it along with Jeff DeMaso. It doesn’t really matter who’s in power, which party is in power, whether they control both houses of Congress or not, the bottom line is that if you can ignore the headlines in the papers and focus on the markets, focus on your portfolio, you will be much better off.

Jim Lowell:

Completely agree with that. We’re always reminding our clients, and for that matter ourselves, that you can vote with your heart when it comes to politics, but you really need to vote with your head when it comes to your portfolio.

Dan Wiener:

You know, it’s interesting, in preparing for this podcast, I was looking at some charts and some various other factors that I look at on a day-to-day basis, and there was a very distinct rally that occurred literally after election day this year, where you saw out of favor sectors of the market like the value sector, the “value” factor they like to call it on Wall Street these days, beginning to outperform compared to say the momentum factor, which right now is characterized by the big tech stocks and the ones that have really driven the S&P so far this year. It’s a pretty distinct line there on election day as to the change in leadership.

Dan Wiener:

I think, if we’re going to talk a little bit about what’s coming down the road, I think 2021 is going to see a lot of these leadership changes as sentiment moves back and forth. The big story last year, of course, was that the momentum stocks were driving the market and value stocks had really, really taken a back seat. In fact, we’re not even sure they were on the bus last year. But then right around election day, things started to change. And I think we’re going to see more of that in the coming year,

Jim Lowell:

I’m certain that we will. And it’s something that you and I, together with the investment research team, talk about frequently. That is another recurring theme, Dan, from last year, and that’s the growth versus value debate, wherein we always point out that we don’t think that being style-specific growth or value really makes all that much sense. What we look for are managers who know how to pay discounted prices, or value prices, for things that can grow well. Whether they’re financial services companies, industrial companies, technology companies, health care companies, we’re really focused on the ability of our managers to deliver long term absolute and risk-adjusted results across a spectrum of investment styles, capitalization ranges, and for that matter, regions.

Dan Wiener:

Just this week, in fact, a paper came out from a very, very well-known value manager, where he essentially said, “You know what? The distinction between value and growth really needs to be excised from the conversation about investing.” And I have to say, as I read it, my grin got bigger and bigger. Because this is something that you and I have talked about, and we’ve talked about with our investment team, pretty much since we started the company over 25 years ago. That the distinction between growth and value is really artificial. And this very, very prominent value investor, he’s a billionaire, he’s made a lot of money being a value investor, essentially said, “You can’t separate the two. You really have to look at each stock, each situation on its own merits.” I’ve always said growth managers often buy growth stocks with a focus on value. They’ll buy them when they’re out of favor. Well, that out of favor often means value, right?

Jim Lowell:

The flip side of that, of course, is value managers want to own companies that can grow reasonably well.

Dan Wiener:

Correct. I mean, the biggest values are in companies that are about to fall apart, right?

Jim Lowell:

Yeah.

Dan Wiener:

They have the lowest PEs, or maybe the lowest price-to-book, and maybe it’s going lower because they’re about to fall off the edge of the cliff. If you go back 40 years, 40-plus in fact, the value index, Russell’s 1000 value index, has outperformed the Russell 1000 growth index, for 40 years. The flip on that occurred in March of last year and all of a sudden growth, and those big momentum large-cap tech stocks that I talked about before, all of a sudden they changed the whole complexion of the 40-plus year history of the two Russell indexes. But over the course of that 40-year history, there have been dramatic periods where growth has outperformed value or value has outperformed growth.

Dan Wiener:

If you go to the latter half of the nineties, when tech stocks were on a tear, into 2000. Then you go from 2000 to about 2006 or so, when value was outperforming growth. So as you said, rather than pick on one or the other, we like to find active managers who buy growth stocks at value prices and look at value stocks when they’re poised to provide market beating growth. So I think this debate is going to continue, but I thought that the capitulation of this one manager this past week was stunning. And like I said, I had a big smile on my face when that was going on.

Jim Lowell:

He must be tuning into our podcast, Dan.

Dan Wiener:

Obviously.

Jim Lowell:

If we flip the script from value to valuations, there’s a lot of talk about market bubbles, tech-sector bubbles in particular, optimism bubbles maybe, floating around our ability to corral the pandemic sooner rather than later. What are your thoughts on market value, valuations? Is the market in a bubble?

Dan Wiener:

Well, I think there probably are always times when there are parts of the market that are in a bubble. I think, in the same way that investors like to take a shorthand and talk about value stocks or growth stocks, to just put a label on the market as being in a bubble is a misnomer. There are parts of the market that are selling at very high prices, and I’m not sure where they’re getting these prices because earnings and earnings growth rates in the future just don’t look like they’re going to be able to keep up. On the flip side, there are always values out there, and as you’ve said before, the active managers we work with are seeking them out. Is the market as a whole in a bubble? I don’t think so.

Dan Wiener:

If you want to talk bubbles, let’s talk about bitcoin for a minute. This is going to be the story well into 2021. Up 300% in 2020, in the first, what have we had, 10 trading days this year, not even, bitcoin was up 41% for the year, just four days ago, and it’s now up just 20%. Now, I don’t sneeze at 20%, but the volatility in bitcoin is crazy. Then we got a guy like Scott Minerd who, two weeks ago, three weeks ago in December, said he thought that bitcoin could get to $400,000, it’s now trading around $34,000. But this past week he said, “I think it’s probably time to trim bitcoin.” At $34,000, he’s talking about trimming it, so I’m not sure where the $400,000 price target was for that. But again, this is the craziness of the bitcoin bubble. So if you want to talk about bubbles, there’s one right there.

Jim Lowell:

Completely agree, and it has all the warning signs of being a mania, just nested inside of the volatility of the price, as you mentioned. It’s not to say that we don’t pay attention to it, certainly we’re very interested in how cryptocurrency develops into what we think will ultimately be a stable store of value. But we are not there yet, and certainly nowhere near it with bitcoin, which remains effectively valued based on what people believe it should be worth, not on anything other than that very, very thin air.

Dan Wiener:

So Jim, a lot of our clients are talking about income coming into 2021. We have seen treasury yield, well, we’ve seen bond yields in general, move up dramatically. The 10-year treasury has more than doubled, the yield has more than doubled since its low of last year at around 50 basis points, or 0.5%. It’s now over 1%. I remember just a few years ago, we were having bets on whether the Treasury yield was going to go over 3%, now we’re ecstatic when we see it go over 1%. But what are we doing about finding yield and is yield really the issue going into 2021?

Jim Lowell:

So those are the two questions. Going into 2021, we don’t expect to see the low yield environment change all that dramatically. Yes, as you point out, moving from a half of a percent, to a percent is a big move. But still, for bond investors who have been bond investors for decades, the thought of a 1% or so yield on a ten-year treasury is not just sort of concerning, it can directly impact their potential for the lifestyle that they thought they’d be able to maintain with the safe side of their assets. So do we think that the low yields are going to persist? Yes. Do we think that the yield environment may improve a bit, we might see a little bit of inflation maybe, even at the tail end of 2021? Possibly.

Jim Lowell:

But you drew the distinction, Dan, between yields and income, and for most investors, they equate the two as synonyms. But we look at income in a more holistic manner, we look at income in terms of total return. So when you look at your overall portfolio, there are many components that go into delivering potential streams of income. Not the least of which are dividend-paying stocks, which, granted, have a riskier profile than a Treasury, but are nonetheless part and parcel of having more than just one bond oar in the water. The other thing that we talk about constantly is ways in which we can reach out a long diversified approach to delivering income and yield without importing dramatically greater risk.

Jim Lowell:

While there are plenty of articles and talking heads out there suggesting that it’s very easy to be able to dramatically increase your yield, the reality underneath their claims is they’re also encouraging people to really stretch their necks out along higher and higher risk lines, whether it’s through real estate investment trusts, master limited partnerships, you name it. There are plenty of high yielding instruments out there, but as our bond guy, Chris Keith, likes to remind us, the yield is always highest before there is no yield. So we are actively looking for ways to manage what we think will continue to be a challenging environment for yield generation.

Jim Lowell:

We do have some approaches that are more multi-asset in nature. So a diversified spectrum of bond instruments that definitely offer relatively reasonably higher yield. Even our core bond positions, however, have been able to demonstrate relative strength, relative to the bond benchmarks. And always, I think it’s important to consider the fact that bonds represent, in a portfolio, not just our attempt at answering the yield in the overall income question, but they also help us tamp down equity risks so that we can continue to take long-term advantage of near-term risk opportunities in the equity market better, with greater equanimity and calm, knowing that we’ve got some bond buffers inside of our portfolios. But what did I miss, Dan?

Dan Wiener:

Well, I think that the important point is that, and I say this all the time, when you go to the grocery store, the cashier doesn’t ask you if you’re paying with bond interest or dividends or what have you, they say, “Cash or credit?” So we think that you can generate “income”, or spending money, in multiple ways. And one of them, of course, is through dividends. One of them of course, is through bond interest. But one of them also is through long-term capital gains. If you grow your portfolio at a faster rate than a 10-year Treasury at 1%, that’s a much better way to generate the kind of dollars and cents that you need to go to the grocery store.

Dan Wiener:

We’ve always been total return investors. And I think that in a low-income world, in a low yield world, like the one we’re in today, more than ever, that’s very important to recognize. Some of the techniques we use, aside from building total return portfolios, is we don’t automatically reinvest distributions. We use distributions to either rebalance portfolios or to provide some of that income that folks need in their checking accounts so that they can go out and spend. Those are just a couple of ideas, right there.

Jim Lowell:

We’ve covered a lot of topics, there are two more that I’d love to touch on fairly quickly, and we’ll certainly delve into them more with the research team with the forthcoming podcast. But one is, we talked about valuations in the U.S. marketplace. When you go overseas, you’ve got baskets of better valuations, born, of course, by much more difficult times, slower growing economies, greater challenges, fewer opportunities to really deliver growth into the global marketplace. Yet we remain diversified, globally oriented investors in active managers who hold multinational companies or directly hold international companies. What are your thoughts on the international valuations, international risks?

Dan Wiener:

Yeah, they’re not all slow-growing Jim. I mean, you are our China guy. Obviously, the Chinese economy, even if you apply a factor that suggests that the Chinese may be inflating their numbers a bit, the Chinese economy is growing quickly. And that is fraught, obviously, particularly given that there’s been a ban on some Chinese companies being owned or traded here in the US. I think China’s going to continue to be an area where the issues are going to be raised about trade and our relationship with them. Let’s not even get into the military side, but politics is going to be pretty intense with the Chinese in the years to come.

Dan Wiener:

But being diversified across the world means that you are looking, or your portfolio managers are looking, for the best companies in different countries, different regions. Also, sometimes the global leaders happen to be based overseas, not in the US. We tend to be very home-country-centric, but there are some amazing companies overseas. Drug companies, technology companies, some of the biggest boomers in the market this last year came from overseas, not from the US. The other factor, of course, is that, as US investors who invest in dollars, our foreign investments benefit from a declining dollar. The dollar has been declining recently and we think that that could carry through in 2021, in part depending on how interest rates move. But the trend is definitely there, so we get a tailwind from this declining dollar.

Jim Lowell:

Dan, let me try and summarize our thinking as we move into 2021, and conclude this excellent podcast. I would say, overall, we continue to think that medical data is still the most important criterion for framing our assessments of economic and earnings data. Politics is likely to remain a contentious thorn in the near-term market’s side. Compared to last year’s first-quarter swoon, earnings comparisons may look healthier than they may actually be. Speculation’s high and expectations should be adjusted to rational levels, especially with regard to bitcoin. Massive stimulus, we think, is more, not less, likely and we’re in favor of whatever it takes to safeguard our economy in the near term.

Jim Lowell:

There are, we think, more reasons to be less pessimistic and even more optimistic in 2021, but of course, that doesn’t mean we’ll ever let our risk-aware guards down. We’re risk managers first and return-seekers second. And finally, one thing is absolutely certain, and you just touched on it, Dan, we haven’t changed our investment discipline based on what others fear. Instead, for more than 25 years, we’ve invested based on the facts we know. And no matter how volatile the next 25 days, or 25 years, will be, we look forward to helping you secure your financial future. So look to our podcast as one way in which we’re always not just on your side, but by your side, every step of the investment way.

Jim Lowell:

On that note, this has been Jim Lowell.

Dan Wiener:

And Dan Wiener.

Jim Lowell:

From Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcasts, your feedback is always welcome. And if you have any questions or topics that you’d like us to explore, please email us info@adviserinvestments.com, and thank you for listening.