Despite stomach-churning market volatility and continuing economic uncertainty, the summer swoon of 2011 is still a far cry from the perilous plunge that shook the country in 2008, say wealth managers and family office executives.
“This does not look like a replay of 2008,” said Bob Matthews, president and chief executive of Fieldpoint Private of Greenwich, Conn. “The liquidity in the system today is massive, and most economic numbers are showing slight improvement, which was not the case three years ago.”
In 2008 there were genuine concerns that “the system was falling apart and money wasn’t safe anywhere,” while this summer people are at least asking how the economy will grow, noted Eric Bennett, chairman and chief executive of Dallas-based Tolleson Wealth Management.
“I’m not sensing the fragility that was present in 2008,” said Brodie Cobb, chief executive of San Francisco-based Presidio Wealth Management. “When I talked to CEOs of corporations in 2008 they were worried about laying people off, not having enough cash and not being levered. They’re not having any of those problems today.”
Recession Worries Remain
While fears of a worst-case scenario have been tamped down, wealth managers remain extremely concerned about the economy and the possibility of a double-dip recession. Trouble in Europe and the lack of options the U.S. government has to combat an economic slowdown are particularly troubling, they say.
“Economic growth in the U.S. is much more challenged today than just a few weeks ago,” said Steve Smith, chief investment strategist for Pasadena, Calif.-based Whittier Trust, citing last week’s revised GDP numbers. Smith put the U.S.’s chances of sliding into a recession at “one in three” and called the Euro zone crisis “a slow motion train wreck” that may take another year or two to unwind.
To make matters worse, the U.S. government is “fiscally almost out of ammunition,” said Sam Katzman, chief investment officer for Constellation Wealth Advisors in New York. “The government doesn’t have the balance sheet to provide an economic stimulus this time,” Katzman said.
And even if the U.S. isn’t technically in a recession, it still feels like one, wealth managers pointed out. “It feels like we never really had a recovery,” Bennett said, “although things are slowly getting better.”
A double-dip recession was a realistic possibility, “but not probable,” said Rob Francais, chief executive officer of San Francisco and Los Angeles-based Aspiriant, pointing to strong corporate earnings and $1 trillion in corporate cash reserves that “at some point will be put to more productive use.”
Wealth Managers Tweaking Strategies
Amid ongoing uncertainty and volatility, some wealth managers say they are tweaking their investment strategies but not making wholesale changes as they make mid-year reviews. “We tend to sell extremes,” said Andy Morse, a managing director of HighTower Advisors based in New York, whose team, Morse, Towey & White, manages around $500 million. “Last week we sold covered calls versus gold for the first time since 2006.”
Others, like Constellation’s Katzman, said they didn’t change anything last week. “We expected volatility, and this year we’ve had more income-generating dividend stocks and long-short equity, and that will continue,” he said.
Meanwhile, Fieldpoint has been under -weighted on equities so far this year,” said Matthews, but plans to “move to over-weight if we see stability.”
Money market funds’ exposure to European banks has also caused Matthews and other wealth managers to make adjustments.
Fieldpoint has moved clients out of money market mutual funds to FDIC-insured money market accounts and certificates of deposit, Matthews said. And Whittier Trust has moved clients to Treasury funds, said Smith, who described money market funds as having changed from offering risk-free returns to “return-free risk.”
Aspiriant implemented a hedge inside its fixed income fund “to protect against a sudden spike in interest rates during the debt ceiling debacle,” Francais said, and is also “actively harvesting tax losses and re-balancing portfolios.”
Contrary to published reports that wealthy clients are shying away from stocks [subscription required], wealth managers say that most of their clients have been “surprisingly quiet,” as Francais put it. “They’re more opportunistic this time,” he said, “rather than panicked.”
Indeed, Bennett reported that “not a single [Tolleson] client made a change last week.”
Fieldpoint clients made “very few changes in their portfolio,” according to Matthews. “With the benefit of last week behind us,” he said, “the question to ask is, ‘Did it give you clarity that you established your risk tolerance properly, or did you just find out that you had over-estimated your tolerance for risky assets?’”