Five options for the comeback kid

These professionals agree that it's time for the long-term investor to get back in the game

By Theresa Ebden
Globe Investor Magazine online, February 17, 2009

In a world of razor-thin bond yields and plummeting stocks, good investments can be hard to find. But investment professionals agree that the market will eventually recover, and that means long-term investors should start scrutinizing their own comeback plan now. Here are five ways to invest your money, if you're in it for the long-term.

BROAD-BASED EQUITY INDEX FUNDS

Long-term investors should own stock right now, says Terry Shaunessy, who manages about $300-million at Shaunessy Investment Counsel Inc. in Calgary. He recommends the iShares Canadian S&P/TSX 60 Index Fund, Dividend Index Fund, and Financial Sector Index Fund. They all have fees under 0.6 per cent, compared to about 2.5 per cent for many actively managed equity mutual funds. He likes their broad exposure to Canada's banks, viewing them as a relatively safe haven amid the global financial turmoil. David Swensen, the manager of Yale University's $23-billion (U.S.) in endowment funds, recommends either an index fund linked to a benchmark such as the S&P 500, or low-cost mutual funds from a company such as The Vanguard Group, where fees can be lower than 1 per cent.

The average investor should consider putting 30 per cent of their portfolio in domestic stocks through index funds, and not through individual stocks, he said. "How can an individual - even if they spend a couple of hours every night after work, or a few hours on the weekend - how can they compete with professional investors who are devoting their careers to this?" he asked.

CHINA

For years, Dennis Gartman wasn't interested in Chinese stocks. The Virginia-based editor and publisher of the widely read Gartman Letter worried investors' needs would be eclipsed by those of the government. Not any more. He changed his mind in November, when Chinese Premier Wen Jiabao announced a stimulus package that was the "biggest contribution to the world," and the country indicated it would move from being an exporting nation to a consumer-driven economy. "China is doing more things right than the rest of the world," said Mr. Gartman. "That was them understanding they have a greater responsibility. They're cutting reserve requirements, they're cutting taxes, they're doing all the right things to get their economy moving."

The iShares FTSE/Xinhua China 25 Index Fund holds 25 of the largest and most liquid Chinese companies. When looking overseas for specific geographic exposure, foreign developed equity shouldn't take up more than 15 per cent of a portfolio, and emerging market equity no more than 5 per cent, Mr. Swensen said.

GOVERNMENT BONDS

If the U.S. economy continues to stumble, it's possible that today's U.S. Treasuries may be a good buy - even with two-year yields at about 0.8 per cent, and 10-year yields at about 2.4 per cent. Mr. Swensen likes Treasury inflation-protected securities (TIPS), whose interest and principal rise with inflation and fall with deflation. The "real" value of your return is protected.

Inflation in the world's largest economy rose 0.1 per cent last year, the smallest annual increase in a half-century. As economic stimulus takes hold and a potential commodities shortfall looms, inflation may rise. "TIPS are reasonably attractively priced today - I think they've got higher real yields than they have had for a number of years," said Mr. Swensen.

For a Canadian fixed-income play, Mr. Shaunessy likes the iShares CDN short bond index fund.

CORPORATE BONDS

All three investors like corporate bonds and are fans of indexed products. Mr. Shaunessy likes the low-fee iShares CDN Corporate Bond Index Fund. Mr. Swensen warns that bond mutual funds aren't a good alternative unless they have low MERs. "Active bond management is a complete and total scam because what the mutual funds do is take credit risk greater than the index ... and charge fees greater than the incremental returns," he said.

As for individual corporate bonds, they are best left to professionals with deep pools of money for diversification and research staff, who can afford to accidentally pick a loser or two, Mr. Shaunessy said.

For those investors, Mr. Gartman likes makers of genetically engineered seeds, such as Monsanto Co.'s drought-resistant corn. His plan is to own the company's bonds, and short ordinary corn futures, on a bet the former will rise more than the latter.

COMMODITIES

Canadians have a good reason to want oil to rise, Mr. Shaunessy says: About 30 per cent of the Canadian stock market is directly involved in energy.

"If oil goes up, you'll be rewarded," he said. Oil has lost three-quarters of its value since July's record $147.27 a barrel. If you want more oil exposure, he recommends putting 5 per cent of your capital to work in a broad-based commodity index fund. In particular, he likes the PowerShares DB Commodity Index Tracking Fund, which includes oil, gold, aluminum, wheat and corn. "I think if you're concerned that a lot of this stuff could be inflationary, you're better off holding a commodity index than you are holding cash now," he said.

Mr. Gartman, who started his career as a commodities trader, is not enamoured with oil. "When oil starts going up, I'll own it. If I miss the first 5 per cent rise, I could care less, the first 10 per cent, too. There are those who are smarter, braver, or dumber than I to be the first in, I'm not sure which," he said. He recommends allocating 5 per cent of a portfolio to gold and claims to review this hourly, because "I've seen gold fall $40 in an hour in the past."

It is currently hovering near 900 an ounce, after rising less than 6 per cent last year. "I don't like being bullish of gold, I hate myself for it. I don't like betting on the world being bad," Mr. Gartman said. "It's the world's third currency - the dollar first, euro second, gold is third. It's good when the world is bad." Mr. Swensen advises against gold - no longer linked to major currencies, he notes gold's returns in the past 200 years have been worse than cash. When adjusted for inflation, gold's returnsfell 0.3 per cent between 1802 and December 2006. Short-term government bonds returned 2.8 per cent in the same period.

Special to The Globe and Mail