In a word, none.

Equities are undervalued if you look at their projected price-to-earnings ratios at the end of this year, based upon projected earnings. But the projected earnings may be overstated if the economic recovery slows down or stops altogether. Emerging market equities are the new hobby-horse of the investment community. Our clients’ portfolios hold some, but the attention of the “what’s hot” crowd probably means they will do badly for a while until the investors with ADHD move on to some other “hot” product.

Bonds were the best-performing asset class in the decade just concluded and are the best so far in 2010. But when the Fed starts to raise interest rates (not a 2010 likelihood at this juncture), the value of outstanding bonds will fall. Our two Morningstar award-winning bond managers, Bill Gross at PIMCO Total Return and Dan Fuss and his team at Loomis Sayles, have produced positive returns so far this year while trying to position their funds for interest rate increases down the road.

Cash and cash equivalents are yielding almost nothing, unless you are willing to tie up your money for an extended period of time. We think that this would be a bad idea in an environment where interest rates are expected to rise. Starmont is using short-term bond funds as cash substitutes since they give better yields than money market funds and can be liquidated in one day with no penalty. They do carry some interest rate and credit risk but not much given their duration and the quality of the investments inside those funds. For clients who want what they perceive as zero risk, we can do CD ladders like we did in 2008. The risk there is inflation if prices rise while you are in low-yielding CDs.

Residential real estate may have bottomed, but there does not appear to be an upturn in prices. We have been approached by a number of newly created residential real estate funds that are designed to purchase and own homes, lease them out to cover the cash flow and then sell them when the prices go up and distribute the profits. But we have very little appetite for illiquid real estate investments, given what has happened with commercial real estate funds, particularly with the managers of these new funds having little or no experience in investments of this kind.

Commercial real estate in the form of domestic Real Estate Investment Trusts (REITS) had a good first quarter this year and a lousy second quarter. International REITS did even worse. Recovery in the commercial real estate market depends on the recovery of the economy. The jury is still out on that.

Gold. Jurrien Timmer, the manager of the Fidelity Dynamic Strategies Fund, has about 10% of that fund invested in gold. We are happy to let him do the investing for us as this is an asset class with no metrics—it goes up or down based upon sentiment. (The lower the sentiment, the higher the price of gold, which accounts for its current high price.)

Hedge funds are just funds that invest in various securities, which many times take different forms, such as private equity or the equity of companies that are being acquired or in debt such as distressed debt, and are in some manner hedged against downside risk. Rick Lake and his Aston/Lake Partners Alternatives Fund invests in many of these asset classes for us while being a mutual fund and subject to mutual fund regulation. Our San Francisco program with Rick was recorded and is up on Starmont’s website in three fairly short segments, with each segment labeled by topic. Go to www.starmont.com and click on the link in the What’s New column on the home page.

As one researcher said, “No asset class offers table-pounding opportunities…we are faced with ho-hum upside in a risky world.” But things change and there will be better opportunities at some point. We want to make sure that we are prepared to recognize and take advantage of them when these changes occur. In the meantime, we want to work with our Clients’ other professionals to ensure that they receive excellent advice in areas of their personal balance sheet such as tax planning, estate planning and mortgage assistance, designed to help them deal with upcoming issues and to take advantage of opportunities. This is part of what we do to achieve our goal of preserving and growing our Clients’ net worth so that they can have the life they want to lead.

This entry was posted on Tuesday, August 10th, 2010 at 8:20 pm and is filed under Blog, Messages to Starmont Clients, The Market. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.