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INVESTMENT OUTLOOK : 1988 OUTLOOK : MARKET PROS : Money Managers Make Their Picks for 1988

December 06, 1987

What are the investment outlooks of institutional money managers for 1988? Michele Lingre, a Los Angeles free-lance writer, interviewed various California money managers to find out. Excerpts of their comments follow:

Robert G. Kirby, chairman of Capital Guardian Trust, was named last month by President Reagan to the commission investigating October's stock market crash. His firm manages more than $15 billion, and its clients include Coca-Cola, Dow Chemical, Ford Motor Co. and Stanford University.

"Our investment philosophy is pretty old-fashioned. Most of our clients hire us to manage common stock portfolios. So there isn't much of an investment mix. We're not trying to hit home runs, we are just trying to hit singles. You can call me Captain Caution. Still, you know, somebody invested 90% in stocks is not that cautious. But you don't have to be too nervous in a market that's slightly overpriced. If you take Fortune's top 50, I'd faint if we don't own 30% of those, stocks like General Electric, Exxon. We're invested in high-quality, traditional, big companies. Our largest holdings are in stocks like IBM, Merck, Ford Motor, Chevron. You know, if you are running $15 billion in assets and you are not buying any IBM, you've got a hell of a problem.

I think since the crash, everyone has made a modest shift away from cyclical companies toward interest-rate-sensitive stocks. After the crash, we spent some cash and put it in counter-cyclical companies like J. P. Morgan & Co., American General and utilities like the Bell companies. There are no major changes planned now. You know, if you're running $15 billion in assets you can't just say 'Whoopee! Let's change our portfolio.'

"For the man on the street, it's still sort of wise to hang around, keep a little buying power and find out whether the trauma is really over. The market seems reasonably priced to me, although less attractive than bonds. As to where the market is going, I don't have the foggiest idea, and since I don't get paid much to guess, I won't.

"It's a good time to have a balanced portfolio with stocks, bonds and real estate. I've never been a precious metals guy--the value of gold is in the eye of the beholder. Its only applications are in jewelry and dentistry, and I don't want to invest in something that depends on somebody else's emotions or the politics of South Africa. When you go through a period like the past one, you get all your humility back and you realize that your ability to predict the future is about the same as your granddaughter's. I'm just going to stay where I am."

James P. Owen, executive vice president of NWQ Investment Management. The company manages overall assets of more than $800 million for such clients as Directors Guild of America, Unisys and National Bulk Carrier.

"The October crash was a worldwide collapse in stock prices that in all likelihood will bring about a slowdown in the economy. But we don't we know how severe the slowdown will be. Even Alan Greenspan doesn't know that.

"If we suspect that we may be entering a bear market, then what recession beneficiaries can we identify? The quickest to come to mind would be bonds. Government bonds have maximum liquidity and they are non-callable, unlike a corporate bond and there's minimal credit risk. In 1988, we wouldn't be surprised to see government bonds appreciate, let's say, 15%-20% in total return.

"On the other hand, we would avoid housing stocks--about the only people who find real estate attractive today are those who are trying to unload most of it. In our opinion there continues to be overbuilding in most of the money centers (and that will hurt) financial services. I'm not predicting that Willie Nelson is going to have a 'Traders Aid' concert in Central Park, but a number of the brokerage firms are likely to be in trouble.

"Going into October, NWQ was 50% in stocks, 20% in two- to four-year government bonds, and 30% in cash equivalents like Treasury bills. Since the crash, we became even more defensive. Now our asset allocation mix is 35% stocks about 35% government bonds, and that would be split between two- to four-year maturities and 10-year maturities. The remainder, about 30%, is in cash equivalents.

"Our strategy is that even in times of recession, people still buy food, toilet paper, toothpaste. People may even drink more beer than they did before, and they'll still take aspirin. So we key on consumer staples. Of the 35% invested in stocks, probably one-third of that would be in the consumer staples, utilities and telephone stocks; another one-third would be in pharmaceuticals, property and casualty insurance, and the third group would include some of the beneficiaries of the declining dollar--chemical companies, paper, guys who are exporting."

Robert M. Raney, senior vice president and chief investment officer of Summit Management, which manages $500 million. Its clients include Magnetek, Occidental College and Pacific Homes.

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