Experts see emerging markets as investment play 

We are just limping out of a historic recession; unemployment in San Francisco stubbornly hovers at 10 percent; storefronts are empty, the stock market languishes and the recent European debt crisis has crippled our confidence in foreign markets.

For many, this is the worst economic meltdown yet, and it’s had a lasting effect. Recent surveys show that 57 percent of Americans still believe stocks are too risky to invest in right now.

While the public may be more invested in anxiety than the stock market, money mangers say our fears are not rational.

Consider: consumer confidence is making a comeback, especially across the shell-shocked Bay Area, which was hard hit by the severe decline in the real estate market. On top of that, personal incomes increased by .9 percent in the first quarter this year, according to the U.S. Bureau of Economic Analysis.

Bottom line: it’s riskier to not be invested in the stock market.

“It’s understandable that people are cautious, but I’d say they are being too cautious as evidenced by all the cash still on the sidelines,” said Erik Davidson, managing director for Wells Fargo Private Bank in San Francisco. “People are scared of losing money, but you aren’t going to get where you need to go by treading water.”

He pointed out that there is $3 trillion sitting in money market funds, which are earning one-eighth of 1 percent interest. At that rate, it will take roughly 553 years to double your money, Davidson said.

So once you’ve set aside your angst, where should you be investing?

“First, be diversified,” Davidson said. “Hopefully, after what we been through people understand there is no such thing as a sure thing.”

Beyond that, money managers have great confidence in international markets, especially emerging markets in developing countries, including India and Latin America. Unstable European markets and the debt crisis in Greece have made U.S. investors feeling apprehensive. Yet because two-thirds of world’s stock market wealth is outside of the United States, money managers advise that for every $2 invested in domestic stocks, $1 should also be invested in international markets, Davidson said.

“Americans tend to lament the challenges of foreign competition and that’s understandable,” Davidson said. “But if you can’t beat them, buy them.”

Kevin Gahagan, principle with Mosaic Financial Partners in San Francisco, agreed. Global markets are expanding so rapidly, he said, American investors have no choice but to have that foreign exposure.

“If I was going to make a bet it would be that the growth prospects of developing countries are going to outpace those of the U.S., but not without a lot of volatility. So anyone investing in those markets needs to be prepared for significant swings,” Gahagan said.

Some investors are getting the message. In a recent survey conducted by the Franklin-Templeton group of mutual funds, based in San Mateo, 50 percent said in the next decade they believe the best stock investment opportunities to be outside the U.S., while 46 percent said they feel the U.S. represents the best opportunities.

But Conrad Herrmann, senior vice president for Franklin Equity Group and manager of Franklin Flex Cap Growth Fund, said investors should not become shortsighted by the day-to-day volatility in today’s U.S. market. Herrmann believes American enterprise is in a “healthy position.”

“I think with the last earning reporting period in the first quarter, 75 percent of companies beat on the bottom line,” Herrmann said. “Enterprises are flush with cash. I’m not worried about a double dip — it’s just a soft patch related to what’s going on around the globe.”

Bane of investor: Risk vs. reward

Everyone is afraid they will lose their money in the stock market — especially after suffering through a lost decade like the one we just had.

But cross your fingers — because money managers say things are looking up, including the stock market.

“Things are getting brighter and things are getting better,” said David Gambelin, senior vice president at Morgan Stanley. And we are projecting growth in domestic product both here and globally.

But for those who remain leery and want to return to investing more cautiously, there are less-risky options, including certificates of deposit and money markets, Gambelin said.

But keep in mind, safer bets are not always the best bets.

“At this time anything that’s very safe is also very expensive, meaning the return is very, very low,” Gambelin said. “As an investor it’s always a risk vs. a reward.”

Another option that could be cheaper for investors are exchange-traded funds, or EFTs, he said, which are growing in popularity in part because they tend to be cheaper than mutual funds. EFTs are like a mutual fund, a basket of stocks or other investments, that trade on an exchange, like a stock. Mutual funds can charge a variety of fees, eating into investment returns.

EFTs are a way for individual investors to access commodities on the market, mirroring the price of these commodities, Gambelin said. 

And while you might pay a mutual fund manager 1 percent vs. .5 percent for EFTs, the mutual fund might outperform in the long run, Gambelin said.

“I think EFTs are great for a portion of a portfolio, they are a great way to access commodities,” Gambelin said, but “It’s not always better.”

— Erin Sherbert

Where four money managers are investing now

Conrad Herrmann

Senior vice president, director of equity portfolio management-U.S. growth, Franklin Equity Group and portfolio manager, Franklin Flex Cap Growth Fund

I focus on investing in sustainable growth companies that meet our criteria for growth, quality and valuation.

In the U.S. equity market, I’m finding attractive opportunities across the market cap spectrum, particularly in sectors such as:

  • Industrials.
  • Technology.
  • Health care.

Kevin Gahagan

Principal, Mosaic Financial Partners Inc.

If given $1,000 and a five-plus year expected horizon, I’d invest in a diversified emerging market fund.

Particularly for those whose emotions will not dominate during difficult markets, a healthy allocation to the emerging markets as a part of the investor’s international allocation is sound for the long term. Overweightingone’s emerging markets allocation can be justified given these markets’ higher long-term growth prospects. Investors will have to experience significant volatility to achieve this growth as witnessed in 2008 and 2009.

Top three things to invest in now:

  • Diversified EM.
  • A small-cap value fund.
  • International small-cap fund.

Erik Davidson

Senior vice president and managing director of investments, Western region, Wells Fargo Private Bank

The common rule of thumb is your age should be the percentage you have in stable, income-oriented investments (bonds, etc.). Applying that rule of thumb, a 30-year-old would have 30 percent in stable, income-oriented investments and 70 percent in growth-oriented investments. 

Top three things to invest in now:

  • If you don’t have your cash reserve set aside (i.e., the amount of cash you need in order to not react emotionally to market gyrations), do that.
  • Invest for long-term growth through global equities for a tilt towards emerging markets (the more time you give this to work, the better).
  • Invest for income with shorter maturity municipal bonds or corporate bonds in order to minimize the potential price declines that will come when interest rates eventually move higher.

David Gambelin

Senior vice president, Morgan Stanley

The three opportunities we are focused on with clients:

  • Hedge interest rate risk, because we believe rates will go higher — so be careful with your bond portfolio.
  • Add commodities and the core holding.
  • In your municipal bond portfolio, reallocate into state general obligation bonds and into essential service revenue bonds.

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Erin Sherbert

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