Value picked to outperform growth over 12 months

A shaky economy and a volatile stock market has led advisers to have a bias toward value stocks in the year ahead, according to the 2008 InvestmentNews Industry Attitudes survey.

This year’s survey was conducted just prior to the financial crisis on Wall Street that has ignited widespread fears of a prolonged economic downturn.

Survey respondents picked value stocks to outperform growth stocks over the next 12 months by 52.4% to 47.6%, while in the 2007 survey, they favored growth over value by 68% to 32%.

“I expect value to continue to do well, because those companies paying dividends will be the place to hide out for a while,” said Will Hepburn, president of Hepburn Capital Management LLC in Prescott, Ariz.

The general economic slowdown should favor value stocks, he added, if for no other reason than the stock market’s pullback will make growth stocks more expensive on a price-earnings-ratio basis.

Mr. Hepburn, who manages $18 million in client assets as an active trader, cited the 2000 to 2002 market downturn as a period when value outperformed growth.

In terms of a general market outlook, the largest percentage of survey respondents (34.8%) said they expected the Standard & Poor’s 500 stock index to be in the 1,300 to 1,399 range in one year.

Through the third week of September, in the midst of a two-week period of extreme market volatility, the broad market index hovered around 1,200, reflecting a decline of more than 17% from the start of the year.

Roughly 28% of respondents expected the S&P 500 to climb to between 1,400 and 1,500 over the next 12 months, and 9.8% expected the index to be above 1,500.

Even considering that the survey was conducted before some of Wall Street’s biggest financial institutions began making public their vulnerable balance sheets, the survey found that more than 27% of respondents placed the S&P 500 at 1,250 or below a year from now.

Of those, 17% said the index would be between 1,200 and 1,299 a year from now.

On the extreme bearish end, 2.6% of advisers surveyed expected the index to be below 1,000 a year from now.

“Right now, everybody seems to think the sky is falling,” said Steven Elwell, a financial planner with Schroeder Braxton & Vogt Inc. in Amherst, N.Y.

Mr. Elwell, whose firm oversees $223 million worth of client assets, doesn’t count himself among the market’s bears, and he is already looking for opportunities to buy some beaten-down stocks.

“It’s like the day after Thanksgiving right now; everything is on sale,” he said. “I’m a long-term optimist and I expect the market to be higher in 2009, but I also expect more volatility and a sideways market for the rest of this year.”

RESPONDENT PROFILE

This year’s online survey included responses from 512 financial advisers and brokers. It was conducted Aug. 18 to Sept. 8.

The purpose of the annual survey was to gauge the general market and economic outlook of those financial professionals working most closely with individual investors.

The majority of respondents (58.1%) used a combination of fees and commissions as a compensation model, while 33.3% were fee-only and 8.6% relied exclusively on commissions.

Advisers overseeing between $20 million and $49.9 million comprised 23% of respondents, followed closely by 22.8% who oversaw between $100 million and $499.9 million.

The next largest groups were the 16.8% of respondents overseeing between $50 million and $99.9 million, and 15% of respondents overseeing between $10 million and $19.9 million.

On the extreme ends, 6% said they oversaw more than $500 million and 1.4% of respondents said they don’t oversee any assets, which suggested they work for clients on a flat-fee or retainer-fee basis.

In terms of overall experience, 36.3% said they had been in the business for more than 20 years. The next closest category, between six and 10 years, was represented by 18.9% of respondents.

MARKET CAP

If nothing else, the current market volatility has reinforced for some advisers the importance of a diversified portfolio.

“It’s unclear as to exactly how much bad debt is out there, but I still think you’re going to do well by spreading the risks amongst different style boxes,” said David Guterman, principal of the Guterman Organization, a Los Angeles-based firm that works with clients primarily on a flat-fee basis.

As style boxes go, beyond growth and value, 40.7% of survey respondents thought larger companies would be the strongest performers over the next 12 months, while 32.1% favored small-cap stocks to outperform and 27.2% chose mid-cap stocks.

Looking beyond the U.S. markets, 52.5% of respondents planned to maintain their current allocation to international investments over the next year.

More than 31% said they would reduce their exposure to foreign markets in the year ahead and 16.4% intended to increase their allocations to international investments.

“I’m always pushing people to do more international investing,” Mr. Guterman said.

“Most of my clients understand the idea of international diversification at least in concept, but I’m shooting for as much international exposure as people can get right now, which is in the 40% or 50% range.”

While the case for diversification is difficult to dispute in any market cycle, 2008 has so far been a year in which the pain has spread fairly evenly across style boxes, as well as international borders.

Roughly 48% of respondents recommended international exposure of between 11% and 20% and 33% recommend more than 20%. The remaining 19% urged exposure of between zero and 10%.

Through Wednesday, the best-performing broad market mutual fund category was small-cap stocks, which averaged a 10. 4% decline over the period, according to Morningstar Inc. of Chicago.

The average large-cap growth fund declined 23.6%, the average large-cap value fund fell 20%, and the average foreign large-cap blend fund declined 29.6%.

The tendency by at least half of advisers to stay the course with regard to international investing illustrates that “most advisers are already ahead of the curve in this area,” said Brian Pon, a financial adviser with Financial Connections Group Inc. in Corte Madera, Calif.

“I don’t believe the claim that simply investing in U.S. multinational companies gives you the international exposure you need, because if you ignore international markets, you ignore some great companies,” he added.

Mr. Pon, whose firm oversees $120 million in client assets, joined the majority of survey respondents who relied primarily on mutual funds when investing on behalf of their clients.

When asked to rank which products are most important in investing client assets, 57.2% of respondents ranked mutual funds first.

Roughly 13% of respondents said that exchange traded funds were the most important product, followed by stocks and separately managed accounts, each at 11.5%.

Annuities earned 6.5% of the votes and hedge funds were a no-show.

With regard to hedge funds, 55.4% of respondents whose clients do own hedge funds said they had not decreased their exposure in client portfolios to the alternative asset class, while 44.6% said they did cut back on hedge fund investments.

Roughly three-quarters of advisers surveyed recommended ETFs to their clients.

E-mail Jeff Benjamin at [email protected].