Stocks in the portfolio include homebuilder NVR Inc., craft chain Michaels Stores and Hovnanian Enterprises, another builder. Hovnanian trades at a P/S ratio of 0.5, despite quadrupling in price this year. NVR was no slouch either. It doubled in 2001 and is up more than 60% year to date. It's the stock-picking system that Hennessy credits for discovering homebuilders.
RegentAtlantic has created its own disciplined equity portfolio for large-cap U.S. stocks that also relies on proprietary quantitative selection. The goal, of course, is to outperform the S&P while minimizing risk. "We're ahead so far," says Chris Cordaro, who oversees investments at the firm.
Cordaro also is on the lookout for fixed-income alternatives without incurring unnecessary risk. One fund the firm is using: Scudder Presentation Plus, which has a 4.5% fixed rate of return, no fluctuation in share price and standard deviation of 1%. The fund is available exclusively for IRA accounts. "Our optimizer likes this fund at lot more than than a bond fund at 5.25% with a standard deviation of 8%," Cordaro says.
RegentAtlantic and other firms are also rethinking annuities and give TIAA-CREF high marks for its fixed annuity offering, which is guaranteeing 4.1% a year and has no early surrender charge. "It's much better than a CD and has complete liquidity," Cordaro adds.
Allocation Allocation Allocation If most investors are experiencing anxiety, retirees and near-retirees are in shock-and with good reason. Seeing your retirement plan assets cut in half is a nerve-wracking experience even for steel-willed clients. While investors' first reaction may be to flee stocks altogether, advisors are using a more disciplined tack. But they admit they've pulled back on equity allocations for older clients.
"If three years ago the mix was 60% equity, 40% fixed, today it's closer to 40% equity and 60% fixed," says Maryland planner Thomas Curtis, a coordinator for the recent FPA Mid-Atlantic Retreat in Cumberland, Md. While most advisors at the FPA Retreat say they would have preferred that prospective clients came in the door before they sustained avoidable losses, planners are rolling up their sleeves to help them now.
Sometimes that means convincing investors to sell assets to which they've developed an emotional attachment. It upends their notion of "buy-and-hold" investing, even when it's the right thing to do. "I just finished working with a 56-year-old and convinced her to redeem two zero-coupon bonds so we could rebalance her portfolio and use the gains to offset significant losses in her stock portfolio," Curtis says.
Hogan's firm is scaling back stock allocations on a relative basis. "We started muffling stock allocation about 18 months to two years ago," Hogan says. "A big move in our firm was to go from 65% stocks to 60% stocks. If they're older, we want them at 55% stocks. We want to create a lifetime stream of income for them," adds the planner, who says her firm is using annuities from DFA, TIAA-CREF and Vanguard to lock in returns for a small percentage of client portfolios. "The goal is to protect them against the risk of living beyond their life expectancy, which half of them will do," Hogan says.
Being tax smart helps, too. To pay for client annuities, Hogan scours client assets for life insurance products that are losing money. "We consider the idea of a tax-free exchange to an an annuity, while using the tax loss to offset income. It's the only way you'll be able to recognize the loss on insurance products, and it's a sound way to minimize gains elsewhere in a portfolio," Hogan says.
Rethinking Retirement Perhaps the best news is that the standard 4% withdrawal rate for retirement assets most planners use will likely hold. "But it won't be any higher than that," predicts RegentAtlantic's Bugen.