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Feature Story: Staying Balanced in Changing Times

Kentucky investment professionals say re-allotment is smart, but overreaction isn’t

By Matthew Moore

By Mark Green

To clients concerned about protecting their money, Kentucky wealth managers continue to advise against overreaction to the large, erratic economic impacts of the COVID-19 pandemic as well as massive relief programs expected from new management in Washington.

They do call for re-allotment, though, to reflect pandemic influences on the economy.

The basics of investing and asset management are unchanged: Continuously allot money to a range of assets that collectively provide reliable returns with tolerable stress. Then live your life—continue to contribute and allow long-term returns to generate compound growth. Rebalance holdings regularly, yes, but trying to outguess the market is never a strategy the pros advise.

Regarding the prospect of outsmarting market gyrations, Jack Russell, principal of Russell Capital Management in Lexington, likes to cite the sage advice of writer Mark Twain: “It’s very hard to predict things, particularly the future.”

Russell has been in the wealth management business for 54 years—with then-Hilliard-Lyons (now Baird), Dean Witter and JC Bradford before opening his own company. His father spent 40 years in wealth management.

Russell readily offers his well-educated guess that for the next five to seven years the U.S. economy will be awash in “a tsunami of cash…The programs that they have said they are going to put in are going to cost a lot of money, an unfathomable amount of money.”

That money inevitably will find its way to assets with the best return in a relatively low-interest-rate environment—the result being that real estate and equities should be attractive, and likely even bonds.

Damon Massey, investment advisor with Stock Yards Bank, said the volume of money coming into the economy makes periodic rebalancing of client portfolios important to maintain long-term strategies.

“2021 finds us at the beginning stages of an enormous transfer of wealth from baby boomers to younger generations. While estimates vary greatly, there could be as much as $70 trillion transferred to lower generations over the next 20 years,” Massey said. “The rally in capital markets over the past 12 years has greatly expanded the amount of wealth held by the boomers. This has served to increase the number of those considered very high net worth, those with $5 million to $30 million, as well as the ultrahigh net worth demographic, those with over $30 million.”

Government spending and central bank support in response to COVID throughout the globe has reached epic levels, he said. This has rapidly elevated global economic liquidity, which in turn has created severe macro-economic distortions.

“These distortions have caused good and bad short-term outcomes. On the good side, it has supported consumer finances, small business, and employment. On the bad side, it has encouraged, and so far also rewarded, excessive risk-taking, especially in stocks,” Massey said.

“Money seeks the best level,” Russell said. But even this unprecedented time ahead with trillions of dollars “sloshing around and it can’t earn interest rates,” doesn’t change his basic advice to clients.

An actual need for significant change in clients’ wealth management investment strategy arises from clients’ personal lives—from retirement, death of a spouse, or sale of a business—rather than market conditions, he said.

“If your needs from your money change, then you should look at changing your investment allotment,” Russell advises.

“2020 was a reminder of why it is so difficult to time and predict markets,” said James R. Allen, vice chairman of Baird, the Milwaukee-based employee-owned firm that has the largest operations in Kentucky after acquiring Hilliard Lyons in 2019. “What looked like an equity market meltdown in the spring of 2020 turned out to be an outstanding year for patient and steadfast investors.”

The need to maintain one’s strategic cool during a meltdown is one of the top arguments professional wealth managers make for engaging their services.

“Fueled by additional financial stimulus, 2021 will likely require similar resolve as higher market volatility from these record valuation levels is probable, even as the economic recovery progresses,” Allen said in comments submitted to The Lane Report. “As always, investors should focus on long-term results with a diversified portfolio structured to consider an individual’s unique risk profile and investment needs. Given these factors, the value of professional advice has never been greater.”

The Lane Report solicited responses from a number of Kentucky wealth managers regarding whether the combination of COVID-skewed economics—impacts varying widely between booming for e-commerce to bust for hospitality—combined with plans by the Biden administration for trillions in relief measures into the U.S. economy merit deviation from long-term-investment basics.

Jason Trennert, chairman of Strategas, a financial services research firm and Baird partner, said active engagement is warranted for 2021.

“We believe an active rather than a passive approach to asset allocation is warranted given the extreme measures to combat the virus (the lockdowns) and the sheer amount of monetary and fiscal stimulus being brought to bear to ease the economic pain they have caused,” he wrote in February. “With current P/E (price to earnings) multiples on the market near record highs (30x trailing earnings) and long-term interest near record lows (1.12%), investors should expect lower long-term returns from their portfolios.”

It seems reasonable to expect that both inflation and long-term interest rates will rise as the federal stimulus starts to work and the economy more fully reopens, according to Trennert, bringing greater volatility in the economy and in financial markets.

“Greater volatility and lower returns would suggest that professional advice would be helpful in creating a more active approach to saving for retirement,” he said.

Michael Schachleiter, vice president and senior investment advisor with PNC Capital Advisors, says the technology adoption that pandemic distancing accelerated has both improved communication with clients and given clients quicker access to their accounts at a time when low-cost and commission-free trading is more available than ever.

“There are pitfalls that can be associated with that strategy,” Schachleiter said. “We are discouraging our clients from getting caught up in the mania. It’s more important to have a wealth manager who pays attention to the news and, like our PNC teams, can offer this expertise when communicating with clients.”

Schachleiter said technology is best used to enhance discussions with the clients, not replace them. And part of the discussion is to cover the unique shades of gray each client brings to their situation.

“While staying the course through thick and thin is a wise strategy, it’s also true that the economy adapts to changes and that a wise investor will also adapt,” Schachleiter said. “We’ve seen powerful changes in how we shop and dine and we’ve changed the way we work, and we recognize the companies that are winners and losers in the pandemic and (hopefully soon) post-pandemic economy. We also factor the changing political scene into our advice on estate planning, tax planning and more.”

Index funds reflecting the diversity of the S&P 500, the Dow, Nasdaq, mid-caps, emerging markets or others are the most popular set-it-and-forget-it investment tool, but professional advisors often recommend more specific approaches.

When the market gets crazy, the temptation is to not open account statements and wait for normalcy to return, but “craziness creates opportunities,” Schachleiter said. PNC is working with clients “to make good, tactical long-term investment decisions. While index funds can provide broad market exposure, they tend to fail to capitalize on opportunities during uncertain times.”

The U.S economy, according to Kevin Avent, managing director of wealth management with Lexington-based Unified Trust Co., “appears to be in the early post-recession recovery phase of the business cycle. This phase includes an extended period of low-inflation, low-interest rate growth in which equities usually outperform bonds.”

With Democrats in control of federal government, Unified Trust expects another COVID-19 relief package in the near term and spending on infrastructure and health care, accompanied by tax hikes beyond the near-term, Avent said.

“The combination of an improving public health outlook and another significant fiscal stimulus may lead to a rebound in U.S. growth in 2021, even stronger than previously expected,” he said.
Avent notes that index funds are a passive rebalancing mechanism. The S&P 500 Index rose 18.4% in 2020, but within it the information technology sector gained more than 43% while the energy sector declined more than 33%.

Russell said he uses modules and thematic portfolios in addition to index funds. One theme, which he began in 1985, is companies whose business is tied to the aging of the population. The first stock he put into it was Stryker, a medical equipment and implant maker. Recent additions included Intuitive Surgical, maker of the Da Vinci robotic surgery system.

Proper investment strategy, he said, “all builds on what you need from your money.”