By John Kimelman
MIKE KLEIN SAYS THE COVID-19 pandemic has changed the way he and his 25-person investment team at Baird do business. “I don’t think it’s ever going to go back to the way it was, and that’s not bad,’’ says Klein, a Barron’s Hall of Fame advisor whose $13 billion-asset team counts charities, endowments, companies and wealthy individuals as clients.
Speaking by phone from his weekend home outside Milwaukee, the 56-year-old tells Barron’s Advisor that the past two months have led him to reevaluate everything from his team’s decision-making process to the amount of office space it might need in the future. Klein also walks us through his current investment calls which include high-yield debt, emerging markets and U.S. small-cap stocks.
Q: Where you are working from during this Covid-19 crisis?
A: I am talking to you from 30 miles north of Milwaukee, on a farm that I own. From where I work, I can look out over a pond. My partners and I take turns going to the office. I spend three days a week in the office, and it’s enjoyable to be in an office environment, even though there’s just a skeleton crew. We are following the state’s guidelines regarding the number of personnel we can have in the office per floor.
Q: It seems that almost all financial advisors were caught by surprise regarding the way this virus took down markets. Are you in that camp?
A: Well, modeling for an event that would take down the entire U.S. economy wasn’t something we sat around talking about when we were doing our math. The speed at which this thing was moving in the markets forced us to really react much faster than we ever had, which is a good thing in the long run.
Q: How have you adjusted client portfolios in light of a bear market caused by the sharp drop in oil prices and the coronavirus?
A: Yes. First off, we saw the price of oil dropping. We have a lot of investments in small-cap stocks and in adjustable-rate bonds, many of which were tied to energy. We started seeing the price of oil dropping below the cost of production and we realized that we had a real problem on our hands.
So we lightened up on the energy portfolio and we repositioned that more into tech, health care, consumer staple investments. We literally had to go through every single investment we had and we had to screen them, talk to the managers, look at the different positions from private equity to real estate. We went through position by position, account by account. At first we started doing it for the oil price drop, and then we started doing it for the Covid-19 impact.
Q: What areas are you particularly bullish about looking ahead?
A: Well, I’m not going to say we are loading the boat at this point. But the first thing was we started looking at high-yield debt, and we use managers for that. We wanted managers who would buy high-yield debt that was light on energy companies. Our feeling is that investors are not done beating up the oil patch. We have started shifting a bit more out of European equities and more into emerging markets.
Q: Do you think emerging markets are a better bet than the S&P 500?
A: Well from a valuation standpoint and from a standpoint of who got hit by this pandemic first, I think there is a little bit more opportunity right now in the emerging market. But to be clear, we aren’t taking money out of U.S. equites and putting it in emerging markets, we’ve taken money out of Europe and moved it into emerging markets. We are also adding into U.S. small caps, though as I’ve said, we are staying out of energy. When the markets and the economy recover, they should get more of a bounce, and you’re buying at much better valuations.
Q: If you like U.S. small caps, you seem to be implying that you think the U.S. economy won’t be enduring a long-term recession.
A: Well, we’ve taken $2 trillion out of the economy potentially with these shutdowns, but the government is putting more than $2 trillion back into the economy. I hate to say it, but we’ve been here before. This is not even our first time with a pandemic. This country has had pandemics roughly every 50 years since 1776, and we’re still here.
Q: How does that optimism about the U.S. economy figure into your view on muni bonds for your clients’ taxable accounts? There have been a few delinquencies in the riskier areas already, with concerns of more to come.
A: We view munis as our clients’ safety principal and don’t extend for yield into lower quality positions. We are duration neutral and we diversify portfolios and limit our exposure in more volatile industries, sectors and states. We have historically avoided areas that are more prone to volatility in revenues and subject to downgrades, like senior care and hospitals. We analyze the bond covenants and perform a complete credit analysis before purchasing a bond to ensure we are confident holding the bond and fully understand the risks to revenue. And we prefer bonds from states that have better rainy-day fund balances or offer some form of additional credit enhancement that provides additional layers of support.
Q: Many technical analysts have opined that stocks need to retest their March lows before they can truly gain value. Do you subscribe to that kind of thinking?
A: I have absolutely no idea what the markets will do going forward. The problem is that markets are all news-driven. On one day, you get news of atrocious unemployment or on the number of deaths, but at the end of the day, the numbers of cases are coming down on a daily basis.
Q: Advisors have been doing business differently because of this virus, including working remotely and leaning more on technology. How many of those habits and practices do you think will remain once the crisis is over?
A: I don’t think it’s ever going to go back to the way it was and that’s not bad. By that I mean the use of technology, being able to have people work remotely, the use of communication procedures. For example, we are not going back to the three-meeting decisions. Instead, decisions are much tighter and quicker. A lot of our institutional clients, whether it’s a private company or a charity, tell me that this is what they have been doing in their businesses.
We are going to be much more open to having some people work remotely. I think it is going to put a little pressure on real estate, because there will be a little more desk sharing and a little more working from home remotely. I think this period of isolation has completely reinforced our reliance on technology and our reliance on being able to grab data and quickly analyze it.
Q: Mike, thanks for your time.
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