Ben Bernanke’s comment on “tapering,” in his last appearance before Congress, has apparently been lost on the markets. In its latest On the Market newsletter, Morgan Stanley Wealth Management says investors assumed that a sooner-than-expected reduction in asset purchases would lead to an increase in the federal funds rate.
In a June 19 press conference, the Federal Reserve chairman said the current level of the federal funds target “is likely to remain appropriate for a considerable period after asset purchases are concluded.”
The U.S. Treasury market seemed less than convinced and the 10-year bond climbed nearly 30 basis points (as of June 28). Kevin Flanagan and Jonathan Mackay, who authored the Morgan Stanley report, say that the market is operating as if the “tapering” will start some time in September.
Although the stock market has been in record territory of late and economic indicators have pointed to a slow turnaround, there are defensive investments planners and retirement investors should be keeping an eye on.
Seeking yield
Investors seeking yield, are putting their money into dividend-paying investments, which has ultimately pushed up their value. Morgan Stanley Wealth Management spoke with PIMCO portfolio manager Brad Kinkelaar, who heads up the PIMCO Dividend and Income Builder Fund.
He says global dividend investing is an important strategy. “I think global dividend investing is a timeless strategy,” says Kinkelaar. “We aim to build a global portfolio that’s diversified, can participate in most markets and [potentially] outperform in certain environments. This involves three goals: provide an attractive yield today; grow the dividend over time; and provide attractive total returns on a risk-adjusted basis.”
There are generally three types of stocks Kinkelaar says he looks for: Basic Value, Consistent Earners and Emerging Franchises. Basic Value are more mature stocks and generally tied to the economy while Consistent Earners are blue-chip stocks with recurring revenue and strong cash-flow generation over time, he says. Emerging Franchises, explains Kinkelaar, are companies he thinks have the potential to grow over the next three to five years but are willing and able to pay dividends like others.
The worst-case scenario according to Kinelaar would be non-dividend paying companies outperforming the market. “These kinds of markets tend to be very strong and unsustainable. We buy growing companies, paying attractive growing dividends, with a long-term perspective on investment results. We’re in a muddle-through economy now, a good market for us.”
Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community.
