'Plain Vanilla' Funds in Investors' Plain Sight
Subpar Recovery, Taxes Offer Plenty of Opportunities
June 9, 2008
NEW YORK - As the turbulent economy begins to calm down, investors will likely gravitate toward index-based, middle-of-the-road mutual funds, opening the door for opportunists to sweep up bargains, industry experts say. And the safer, the better.
"Investors are looking for plain vanilla' opportunities," said Paul Disdier, director of municipal securities for The Dreyfus Corp., at the annual BNY Mellon Asset Management press briefing June 3 at the MetLife building in Manhattan.
"Mutual funds provide a high degree of capital preservation," Disdier said. "Regardless of who wins the presidential election in November [see related coverage, pgs. 8-9], we're convinced that taxes will go up."
Marketing mutual funds as safe havens for tax-exempt income could be a great sales tactic over the next few years, particularly as Baby Boomers look for ways to preserve their assets, he said.
The current economic climate is providing a lot of opportunity for those who can afford to be greedy when others are fearful, to paraphrase a quote from Warren Buffett's.
Liquidity providers who saw their supplies get sucked dry over the last few months are beginning to look for cash infusions, and smart hedge fund managers are already jockeying themselves for the right moment to sweep in to the rescue.
"Provided they've kept their powder dry, this sets up an opportunity for hedge funds to step into the liquidity world," said Bill Crerend, CEO of EACM Advisors LLC.
Crerend warned that it could be a long, choppy ride, but there is an opportunity to secure assets that will ultimately be rewarding for "serious, thoughtful investors who've done their homework."
"This is one of those environments where investor quality is revealed," he said.
If the U.S. is in a recession, it will likely be shallower than the average postwar recession, but will also be followed by a subpar recovery, said Richard Hoey, chief economist for The Bank of New York Mellon.
Concordantly, Hoey said he believes the world economy is in a transition to a global growth slowdown, not a global recession.
"I think the fever has broken," Hoey said. "The issue was with the supply of credit. Even if it's available now, people may not be in a hurry to leverage again."
Hoey said there is likely to be a slow recovery in new credit supply from lenders and a corresponding lull in new credit demand from borrowers. With steep declines in home prices, the real estate industry will probably go through a prolonged period of consumer restraint before it fully rebounds, he said.
The Sun is Always Shining-Somewhere
Real estate prices may be gloomy in the U.S., but when you look at the situation from a global perspective, the sun is always shining somewhere.
"All real estate is local," said Todd Briddell, chief investment officer for Urdang. "There is no such thing as a global real estate market."
Globally, real estate markets like Hong Kong are doing very well, Briddell said, while the condominium market has been tough in places like California, Nevada and Florida.
The biggest crisis in real estate has been the crisis in confidence, he said. There has been a lack of trust as the credit bubble deflates.
"Markets work just as efficiently when things are going down; it just doesn't feel good," he said. "Sometimes prices have to decline to clear the market."
"Real estate is driven by capital markets and by local supply and demand markets," Briddell said. "There is a huge opportunity for growth in places like western Canada, particularly in regard to the energy industry. Calgary and Edmonton markets are booming."
No Japanese Malaise Here
The real estate market in the U.S. makes up a very small part of the U.S. economy compared to real estate in Japan in the 1990s, said Michael Ho, chief investment officer for Mellon Capital Management.
"The U.S. today is not going to enter a Japanese-style malaise of the 1990s," Ho said. "The Federal Reserve has a much better long-term policy than the Bank of Japan."
It took the Bank of Japan seven years to correct interest rates after the last crash, he said. For many years, banks were continuing to lend to politically connected companies that were unable to pay off their loans. This eventually led to a complete failure of the credit market.
"Can you imagine something like that happening in the U.S.?" he asked.
The Fed's rescue of Bear Stearns in March and its subsequent manipulation of interest rates have averted they type of crisis Japan saw in the 90s, he said.
"Because of the drastic action of the Fed, the confidence in the markets has been restored," Ho said.
"We may have reached a very crucial inflection point at the time of Fed's intervention of Bear Stearns," Hoey agreed. "The Federal Reserve stepped in to stem the systemic risk," and stopped a margin-call cascade.
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