Bespoke Investment Group’s 2010 roundtable discussing asset class expectations

The 2010 Bespoke Roundtable is out, and as always, they’ve done some interesting work. I think it’s extremely insightful. the link to their full post is here: http://bespokepremium.com/roundtable/

They present the aggregated “up or down” predictions very clearly in this table:

I have a few quick comments:

-The up/down prediction for the S&P 500 is mostly “up” with only a couple “experts” disagreeing. Who knows? No one has EVER been able to successfully profit from trying to time the market over a reasonable time period. There are a zillion studies that reach that conclusion, and my summary of the Morningstar book has their conclusions based on their data that confirms the same thing. SO what do you do? Well, I think  you try to capture potential upside from equities by having some long-equity exposure, but you keep long-equity allocations to a minority of your portfolio, and instead spread your assets across multiple asset classes, with a preference for long/short strategies, and you try to generate current income (all the while trying to focus on uncorrelated investment returns).

-Long bonds: everyone polled agreed that they should have a negative return in 2010. There could be multiple reasons: rising interest rates, higher default rates, less attractive yields/valuations…the list goes on and on. This is why I prefer munis that are insured and through closed end funds that are trading at a discount: you reduce your tax liability and you reduce your default risk. The rising interest rate or rising inflation scenario is why I like floating / variable rate debt. You get income from being long debt, but the interest payments increase in size as overall interest rate levels rise.

-Junk bonds: not for me. I don’t know of any consistent and low-risk funds that have demonstrated success in the junk bond / high-yield debt space that I would consider for my portfolio at this present time. I say “at this present time” because entire asset classes can occasionally get cheap enough that you don’t really need to worry about the skill of a fund’s active asset management, but given the recent run-up in junk bonds and the uncertain default risk trend I just can’t stomach purchasing high-yield debt now when I can get similar income generation from other asset classes and can lower the tax impact by going with municipal bonds. Sure, junk bond prices can rise much more when they do rise versus munis or other higher-credit quality debt, but the reason junk bonds rally is usually because of optimism about near-to-medium term economic prospects, and I think that the best case scenario is already reflected in the massive recent appreciation of both junk bonds and equities.

-Gold & Oil: The roundtable has mixed expectations for the next year. I think that’s why I prefer a long/short commodity strategy and a long-term investment horizon. Commodities are an important asset class to have in your portfolio, so you don’t want to forget to have some exposure, even if it’s only a little. If inflation does become an issue, regardless of what macroeconomic demand is, then commodities will benefit.

-The US Dollar: The roundtable is uncertain and so am I about what the Dollar will do in the next year. Over the medium-to-long-term, however, I have very high conviction that the US Dollar will continue to lose its purchasing power and will continue to decline against other currencies, just like it has done over the last 50+ years. This is why I like an absolute-return strategy currency allocation. Currencies are a very, very tricky asset to trade profitably, and I would advise non-expert investors to let the experts handle it and go with a good mutual fund.

-China: Who knows what happens. I will probably always keep a portion of my assets in Chinese equities (I hold HAO), although I have recently trimmed my allocation after the very large run up in Chinese equity prices. Regardless, China has much more attractive prospects for equity investment returns over the long-term than the US does, so I will always hold some China and will look to buy more over time when the overall indexes decline.