Thursday, January 29, 2015

The Case for Strategic Income

Following a 30-year bull market in bonds, investors need to prepare for a long-term rise in rates, cautions Anton Bayer. The CEO of Up Capital looks at this transition and highlights several strategies and positions for the next stage of the interest rate cycle.

Steve Halpern: We're here today with Anton Bayer, Founder and CEO of Up Capital Management. How are you doing, Anton?

Anton Bayer: I'm doing great, thanks very much, Steven.

Steve Halpern: First, could you tell our listeners a little about Up Capital Management?

Anton Bayer: Yes, we're a registered investment advisory firm with about $160 million under management and we manage four model portfolios that are comprised of individual stocks, ETFs, and mutual funds. They are risk-based, so there are four of them; income, balance, growth and income, and growth model portfolios.

Steve Halpern: Now—as a smaller firm—you mentioned that you're not one of the big guys and that gives you some added flexibility. Can you tell listeners a little about how that allows you to react a little more quickly to markets?

Anton Bayer: One of the key aspects that large firms are handicapped with is they have an investment policy that dictates all of the advisors as to how to manage money and, for the most part, it requires the advisors keeping the investors in the risk category that, when they sign the original application, that is what they need to stay in, regardless of market conditions.

If you sign up with a large firm and you identify yourself as a growth and income investor, you will stay predominantly in an overweighted equity position and the advisor doesn't have, typically, the flexibility to increase cash positions or reduce risk, even in situations like 2008, and 2000, and 2002, because the compliance requirements are to keep the client in the category that they sign up for.

As a smaller firm, we write our own ADV—a disclosure form filed with the Securities and Exchange Commission—and our own investment policy.

So, in our ADV, we have established that all four portfolios can go 100% to cash anytime, so even if you're in our growth portfolio, if it is a high-risk scenario, as we believe it is, we can increase the cash position, which, even though it typically doesn't represent a growth portfolio, in our opinion, it is the best allocation at the time.

Steve Halpern: Let's look at the current environment. With the Fed beginning to taper, you see some challenges ahead for Janet Yellen. Could you expand on that?

Anton Bayer: Yes. This market has been so sensitive to Federal Reserve monetary policy since 2007, on both sides of the equation, which adds to our level of confidence that it is a key barometer and influencer to the market.

The best recent example is 2012, when Ben Bernanke ended QE2 June 30, immediately, the first day of the market in July and all the way through August, the market fluctuated significantly and, in the first four days of August, fluctuated 2,000 points in that first week.

It wasn't until Ben Bernanke introduced what we now have as quantitative easing, in October, that the market resumed the rally that we are in right now.

Our concern is that the emerging markets are exposing the dependency on Central Bank monetary policy, as the feds continue to slowly wind down and taper their quantitative easing, and then that is going to eventually start bringing the exposure into the US economy, as they continue tapering from $85 billion at $10 billion a month, continue reducing that.

Currently, we have an economy that is growing a meager 2.5% to 3%. We still have a high 7% unemployment and we've had trillions of dollars invested from the Federal Reserve and the federal government index, in spending and stimulus, and we have a lackluster economy.

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