Wealth Matters: Analysts and Advisers Review 2011 Investment Predictions

I’M not the only one who has seen prognosticators through the years make a wrong call — Dow 36,000! Dow 5,000! But I can’t recall any of them being asked to explain months later why they slipped up.

So last January, I thought it worthwhile to find a group of analysts and advisers who would be accountable for their predictions, a group willing not just to make investment recommendations for 2011 but also amenable to my checking in every quarter to assess how they were doing.

Let me pause and thank the group for being good sports. Only one dropped out, when he left the firm, and one other was miffed when I highlighted a call he had changed.

As for the exercise itself, it did not turn out as I had expected. When 2011 began, many indicators in the United States were pointing to the start of an economic recovery, including improved consumer confidence and increased growth projections. What happened was far different and far more complicated.

Here are just a few of the economic shocks of the year: the earthquake and tsunami in Japan; the revolutions throughout the Arab world; the debt problems in Greece, and now other European countries, that are a drag on the European Union; the spike in stock market volatility from August onward; and the continuing political clashes in the United States over spending and taxes, along with Standard Poor’s downgrade of the country’s credit rating in August.

“This is probably the hardest year I can remember in a very long time for managing money,” said Richard Madigan, chief investment officer for J.P. Morgan’s Global Access Portfolios. In 2008, “you could assess what you thought was happening in the world and dive into the trenches and fight it. This year was tough.”

Still, an analyst’s job is to get things right through thick and thin. So in the final column with this group, I asked the participants to identify their best and worst calls, what surprised them and to predict what lies ahead for 2012.

BEST AND WORST CALLS The one call everyone missed was just how much the prices of United States Treasury bonds would rise, even after Washington almost came to a standstill last summer over raising the debt ceiling and the country’s credit rating was lowered. Beyond that, the best calls were a mix.

Bill Stone, chief investment strategist at PNC Wealth Management, backed dividend-paying stocks at the start of the year and never wavered, though he acknowledged after the third quarter that the reasons this call worked changed as the year went on.

In the beginning, he argued that money was going to move from bonds to stocks, and dividend-paying ones would rally first. Then, he saw a company’s ability to pay dividends as a sign that these companies were well run. After the summer, he and many other analysts pointed out that dividend-paying stocks were a good option for income when the yields on 10-year Treasuries fell to around 2 percent.

Now, Mr. Stone said, the country is in a period of what he called financial repression, where interest rates are lower than inflation, and he said dividend-paying stocks were a good option for generating income and preparing investors for an eventual increase in inflation.

“Dividend-paying stocks at least give you a chance to win over some amount of time,” he said. But the best plan back in January, he said, would have been to have “ignored all that and run to long-term Treasuries, even though it made no logical sense.”

He was not alone in his enthusiasm for this asset class. Mr. Madigan said he had invested $2 billion in dividend-paying stocks in 2011, to good results. He said it was part of a broader strategy of focusing on less volatile investments.

A different rationale motivated Niall J. Gannon, director of wealth management at the Gannon Group at Morgan Stanley Smith Barney, to focus on investing in consumer companies with a global reach, like Procter Gamble or Gillette. (In many cases, these companies also pay dividends.) He remains convinced that the best strategy over the next 10 years is to focus on the middle class in emerging markets (even though his more profitable short-term call this year was on municipal bonds).

“I still have a positive view of humanity,” Mr. Gannon said. “The world welcomed its seven billionth resident. I look at it as the seven billionth consumer. We’re moving in the right direction.”

SURPRISES The big surprise for everyone — after Treasury prices — was just how intense and frequent this year’s crises were. Most members of the group were humbled, if unbowed, by what world events did to their finely wrought analyses.

Marc D. Stern, chief investment officer at Bessemer Trust, said he was glad that he did not get caught up in the emotional swings of the year. “We didn’t panic,” he said. “We made adjustments during the year, but we never went to a position of maximum defensiveness.”

Yet he came across as the most humbled by the swoons of 2011, even though he made some good calls, like predicting solid corporate earnings growth, being skeptical of the value of the euro and adding money to high-yield bonds.

Article source: http://feeds.nytimes.com/click.phdo?i=2e669435d079371e9dd7e07fb0079219