The Barron’s interview this weekend was with money manager Richard Bernstein, who was a well-known strategist at Merrill for two decades before leaving to open his own asset management firm. Some particularly interesting nuggets:
What indicators to watch – and avoid
People spend an inordinate amount of time looking at lagging indicators, such as inflation, and not enough time looking at leading indicators and what actually drives the stock market. Think about how people watch inflation, but it is a lagging indicator. The unemployment rate is another classic lagging indicator. Very few people pay attention to things like weekly initial jobless claims. Yes, they give them lip service on TV and the news, but how many people think about that as a leading indicator of the stock market? Not many.
Risks in emerging markets – and a ‘great rotation’ into US assets
People continue to overestimate the risks in the U.S. I would argue that they grossly — and I’m not using that word lightly — underestimate the risks in the emerging markets. A lot of the problems that people think are inevitably going to crop up here, including inflation and out-of-control money growth, are actually happening in the emerging markets… A lot of people have talked about how the great rotation will be a shift from bonds to stocks. But that’s not right. The great rotation — and the biggest decision you have to make for your portfolio — is that for five to seven years, it is not going to be bonds to stocks, but rather non-U.S. assets to U.S assets. We are maybe in the fourth inning of a secular period of outperformance for U.S. assets.
On being a ‘beta manager’
There are two types of active equity managers out there: alpha managers and beta managers. There are a million and one alpha managers, but there are not very many beta managers. What’s the difference? Alpha managers pick individual stocks, and they say, “I outperformed my benchmark by 200 basis points [each equal to 1/100th of a percentage point].” A beta manager will say, “Well, that’s great you outperformed by 200 basis points, but your benchmark is down 25%.” People talk about the lost decade in equities, but there was no lost decade in equities. There was a lost decade in equities if you invested in the S&P 500, but not if you invested in emerging-market stocks, energy stocks, commodity stocks, or other sectors. So when people say there is a lost decade in equities, it shows that they are very bad equity allocators. In other words, they are very bad beta managers. That’s what we do. We don’t care about individual names. We care about getting size, style, country, and sector right
Among those US assets, Bernstein is particularly bullish on smallcap industrials and smaller US banks (he’s similar to |Covestor portfolio manager Andy Schornack in that regard). Read the whole interview on Barron’s.
