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INVESTMENT OUTLOOK: HOW TO GET AHEAD : INVESTMENT STRATEGIES : PICKS OF THE PROS : Strategies Vary From Thai Stocks to Long Bonds, but Experts Agree It's a Time to Be Cautious

December 04, 1988

What do investment experts expect to happen in 1989 and what are they planning to do? Free-lancer writer Michele Lingre interviewed various professional money managers and others to find out. Excerpts of their comments follow:

James P. Owen, managing director of Los Angeles' NWQ Investment Management, which manages $1.5 billion in assets for such clients as Directors Guild of America and Unisys. :

"Now is a time to try not to lose money, as opposed to maximizing returns. The problem today is that things are too good; the trend is not sustainable. You have unemployment at a 14-year low, the economy growing on eight cylinders, factories operating at or near capacity. What we are seeing is the sober realization that the Reagan economic policies created excesses which the new Administration is going to have to deal with, or the market forces will make the Administration and Congress take steps.

"Therefore, our investment posture is cautious: We've had substantial cash reserves all year and until recently, the return of Treasury bills wasn't much to write home about, but that's changing very quickly.

"We have classic defensive stocks: drugs and food companies. They tend to do well whether the economy is expanding or contracting. It's also an area where you find wonderful valuation. Our stocks also come from export and dollar-sensitive areas, companies like Caterpillar. We would avoid consumer-related issues like auto and housing."

Robert M. Raney, managing director and chief investment officer for U.S. Trust Company of California. It manages $500 million in assets for such clients as Magnetek and Occidental College.:

"Some things make us nervous, like the trade and budget deficits. You wonder, given the split between Republicans and Democrats, will there be a gridlock in Washington? Can they get something done on the deficit? We need to curtail our standard of living as a country, and that means shrinkage of the economy.

"Currently, we are 40% in common stocks, 40% in intermediate-term bonds and 20% in cash equivalents, mostly one- or two-year U.S. Treasury obligations. We are likely to stay there for now. For stocks, the area of strength continues to be the capital goods which have benefited from a lower U.S. dollar, stocks like Emerson Electric and General Electric. IBM looks cheap. Intel and Digital Equipment, if they go down a bit further, might be tempting.

"Our next move in terms of asset mix would be to extend the maturity of our bond portfolios. If interest rates go up--the Federal Reserve is likely to continue a strict monetary policy for some time--we may have an opportunity."

Joan Bavaria, president of the "socially responsible" investment firm Franklin Research and Development in Boston. The company manages about $155 million in assets for, among others, Consumer United Insurance Co. in Washington and All Saints Parish in Boston :

"Right now 45% of our money is in stocks, about 40% is in bonds--municipal or government agency bonds with in an average maturity of five years--and the rest is in cash and loan funds.

"Our clients dictate to us what they want to avoid. Some of them are not interested in the defense industry, others are trying to avoid South Africa or nuclear activities. Most are not interested in investing in companies that have had problems with labor or environmental violations.

"We expect very soft earnings in the last half of 1989, so we are looking for companies with good earnings predictability. Wellman Inc. or Safety-Kleen--two recycling companies--go right through any kind of economic downturn. Some of the sectors that look pretty inexpensive to us at this point include regional banks. Probably we will continue to be invested in selected utilities next year: Southwestern Bell, Potomac Electric Power, TECO Energy.

John J. Arena, a trustee of Batterymarch Financial Management in Boston. Known for its contrarian investment philosophy, the company manages about $9 billion in assets for such clients as General Motors and American Telephone & Telegraph.

\f7 "We look at areas that are unpopular within the market. . . . Batterymarch will run its portfolios 98% to 99% in equities at all times.

"In the U.S., we look at companies selling on a corporate valuation basis well below their intrinsic value. Consequently, we have very heavy holdings in cyclical stocks, technology and financial stocks at this time.

"We are moving moneys into Latin America now and will be in 1989. Our database of Brazilian stocks shows that the medium (price to earnings per share) multiple is somewhere around three, the average dividend yield is close to 10%, and the average return on equity is something like 30%. Yet they sell for roughly half of book value. We have holdings in Varig Airlines, a major airline in Brazil. It flies all over the world and has modern planes but (its stock) sells at two times earnings, has a total market value today of roughly $30 million (U.S.).

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