| NEW YORK
NEW YORK Dec 10 Some money managers can't leave
2012 behind - even if they want to.
That's because President Barack Obama and Congressional
Republicans remain locked in negotiations over avoiding the
"fiscal cliff" - a package of nearly $600 billion in tax
increases and spending cuts that, should they take effect as
scheduled in 2013, could send the U.S. economy into a recession.
While they remain optimistic for a resolution that would
prevent an economic slowdown, some investors say the fiscal
cliff is complicating their investing strategies for the next
year. Depending on what happens in Washington in the next few
weeks, the 2013 outlook for sectors ranging from the housing
market to fixed income could swing widely.
"It's a hard environment to invest in," said T. Doug Dale,
chief investment officer at Security Ballew, a wealth management
firm in Jackson, Mississippi, with $500 million in assets under
management. "If you are riding a bike that's going only two
miles per hour it doesn't take much of a slowdown to tip over."
For now, the stock market seems to expect some type of deal
will be reached to avert an economic slowdown. The Standard &
Poor's 500 stands at nearly the same level it did on Nov.
6, the day of the U.S. elections, and is just 3.3 percent below
its Sept. 14 high for the year of 1,465.77.
But Dale and other money managers say they are following a
two-pronged approach: focusing on fixed income and other safe
assets while they wait out the delay in Washington, and
positioning for the new year once a deal is reached - even if
it's a retroactive fix in early 2013.
SAFE NOW, BULLISH LATER
Ted Wright, director of portfolio management at Genworth
Financial, said safe assets should benefit as the negotiations
in Washington get closer to the year-end deadline that will
trigger the tax hikes and spending cuts. He's focusing for now
on longer-duration Treasuries, which can be easily held through
a fund like the $3.8 billion Vanguard Long-Term Treasury fund
If a compromise is reached, Wright will concentrate on the
improving U.S. housing sector - assuming, of course, that any
fiscal cliff resolution doesn't affect the tax deduction for
mortgage interest, which benefits millions of homeowners and is
widely seen as a support for the housing market.
He plans to increase his holdings in exchange-traded funds
like the iShares Dow Jones US Home Construction index, a
$1.6 billion fund whose top holdings are Lennar Corp,
PulteGroup Inc, and D.R. Horton Inc.
"The rising tide will lift a lot of boats if the housing
market continues to improve, which I think is likely" as long as
the mortgage interest deduction isn't changed, he said.
Other bullish investors are preparing similar short-term
safety plays, such as moving more assets into cash to avoid
losses should the fiscal cliff talks sour.
"Because of the fluid nature of the negotiations we are
prepared to move quickly" over the next few weeks, said Dan
Veru, chief investment officer of Palisade Capital, a fund
manager in Fort Lee, New Jersey, with $3.5 billion in assets.
But in the new year, he plans to increase his positions in
small-cap healthcare service and technology companies because he
expects more of them to be acquired by large cap firms looking
for ways to grow, he said. Approximately 30 companies held in
his funds were acquired in 2012, for an average premium of 40
percent, and he expects that number to continue to increase over
the next couple of years, he said.
There could be roadblocks, of course. Mergers and
acquisitions stalled in the first nine months of 2012, with
worldwide deal values down 16 percent from the year before,
according to Thomson Reuters data. The resolution of the fiscal
cliff, along with the full implementation of the health care
reform in the United States, should give corporations more
certainty to close deals in the new year, Veru said.
Investors who want to piggyback on this strategy could opt
for the $4.5 billion Merger fund, a specialized fund
that focuses on merger arbitrage by buying shares of takeover
targets. The fund, which costs $1.33 per $100 invested, has
returned just 2.2 percent in 2012, compared with a nearly 12
percent jump in the S&P 500. Over the last five years, however,
the fund has bested the S&P index by an annualized 1.4 percent.
A CAUTIOUS APPROACH TO 2013
Dale, the Mississippi money manager, is pessimistic that the
stock market will remain calm about the fiscal cliff. "We could
easily see the market on a short-term basis fall to 1,340," he
said, which would be a decline of 5.5 percent from the S&P 500's
current level of about 1,418.
As a result, he's increasing his position in gold and is
reducing his position in equities to 25 percent of assets from
about 30 percent at the beginning of 2012. The stock market may
have a short-term rally after a deal, he said, but he doesn't
expect the S&P 500 to gain meaningfully in the first half of
Instead, he's increasing his position in emerging market
debt, buying the iShares JPMorgan Emerging Market Bond fund
, an ETF that holds U.S.-denominated debt issued by
countries such as Mexico, Brazil and Turkey. These countries
tend to have less debt and younger populations than the group of
major industrialized nations, he said.