Preserving your portfolio: our panel of expert money managers shows you how to make sure your earnings from the current market rebound don't get washed away

Black Enterprise, April, 2004

IT SEEMS ALMOST EVERYONE HAS BENEFITED FROM THE LONG-AWAITED RECOVERY THAT PROPELLED THE ADVANCE OF THE FINANCIAL MARKETS IN 2003. THE 28.28% RETURNS LOGGED BY THE DOW JONES INDUSTRIAL AVERAGE AND THE 50.01% RETURNS OF THE NASDAQ MARKET INDEX REMINDED US OF THE DOUBLE-DIGIT GAINS THAT MANY PEOPLE BECAME ACCUSTOMED TO DURING THE GO-GO '90S. But if you were lucky enough to recover some of what you lost during the last three years of less-than-stellar market performance, what do you do now to preserve it?

We assembled four top-flight money managers to evaluate the current market rebound and provide strategies investors can use to protect their principal while outperforming the markets in 2004. The members of our roundtable included Stephen Coleman, chief investment officer at Daedalus Capital, a 10-year-old, St. Louis-based investment firm that manages $40 million in equity-only portfolios; Valerie Mosley Diamond, fixed-income portfolio manager with Boston-based Wellington Management Co., who oversees a $9 billion portfolio within Wellington's $330 billion in assets; Drake Craig, principal at 2-year-old Atlanta Life Investment Advisors, (the investment arm of Atlanta Life Financial Group Inc., ranked No. 3 on the BE INSURANCE COMPANIES list with $99.9 million in assets) which manages about $58 million in assets in a large-cap core, and an international portfolio; and Derek Batts, chief investment officer and president of Detroit-based Union Heritage, which manages a large-cap value portfolio of about $250 million for several institutional clients.

BLACK ENTERPRISE: What is your market outlook for 2004?

COLEMAN: As I look out the next three to five years, I think that the world is going to be very, very good for equity investors. If pressed, I would say that between now and the election, it should be very smooth.

CRAIG: In terms of my outlook for 2004, it's an election year and, generally, that spells good things. I think economically, we will see pretty strong growth because GDP numbers are attractive and inflation numbers are low.

BATTS: For 2004, we're cautiously optimistic. We believe that some of the elements are in place for continued growth. Business investment is starting to pickup; we look at the competitive nature of the dollar and how it's driving exports, and inflation seems under control. So we are cautiously optimistic.

DIAMOND: In terms of outlook, our view is that equity should do fine. Corporate bonds will do particularly well. High yield bonds, I think, will do well. I must point out however, that for the last 20 years we've been in a steady decline of interest rates. And looking out, we are going to see the mirror image of that trend so, as interest rates rise, I would not be in U.S. Treasury Bonds, going forward.

B.E.: Are we in a bull market that will be sustained or are we likely to see continued market volatility during 2004?

CRAIG: We've gone through a profits recession over the last couple of years. Companies have been put in a position where they have had to wring out excesses. I think the type of earnings growth that we are likely to see over the next couple of years, should help sustain a market advance.

BATTS: I would agree with that assessment and add that I think there are some structural changes [to the economy] that are going on that we are going to have to address. The impact of the administration's stimulus package, in the short term, unquestionably had some benefit in the third quarter of 2003. But the real question that we have to determine is, Can the administration promise a guaranteed Social Security benefit, Medicare, tax cuts, corporate subsidies, No Child Left Behind, improved education, and still cut the federal deficit? There are some inconsistent policies put forward, and I think that we are going to have to deal with that.

But, having said that, we are seeing that companies continue to accelerate their earnings momentum so we have reason to expect that, in 2004, the rally will expand to some of the higher quality companies this year.

DIAMOND: I wanted to point out that there is a risk to all of the rosy outlooks that we've just described. I'm very confident there is going to be a pickup in business investment, but I'm not as confident on the strength of the consumer because it has been driven by a lot of tax stimulus. The tax stimulus that is coining the first half of this year is about $42 billion, so, again, we're going to get more artificial stimulation, which makes the consumer feel really good about him or herself. When that goes away, which will be in the first half of 2004, the consumer may, in fact, falter unless there is real improvement in the employment sector. Markets are going to be at risk because companies have already gotten very lean and mean. How much more can they cut?

B.E.: What signs should an investor look for that will indicate whether this market has legs to continue or whether it might be slipping back into a recession?

BATTS: As an investor, I would continue to look at business investment and manufacturing--are there increases in capacity utilization? What effect would a rise in rates have going forward? We still believe in the equity markets as places to go but there are defensive sectors. For example, you look at healthcare. You look at staples. During periods of rising rates, you might find investors beginning to go there and realize some value.