Sandy Lincoln, senior vice president and investment strategist, at Milwaukee-based M&I Investment Group oversees a group of funds that manage more than $35 billion in assets. The funds span the gamut from big- and small-cap funds to bonds and a wide variety of products tailored for both institutional and retail investors.
Lincoln, who believes the U.S. economy is about midway through a projected five-year bull run, took some time this week with On Wall Street to provide his big-picture views on a number of timely topics as well as a look back at what financial services firms, advisors and investors have learned from the rollercoaster-like ride of the past few years.
Q: What will be the implications, short- and long-term, for American companies and investors in the wake of the devastating earthquake and tsunami that struck Japan last week?
SL: There are several things you can anticipate following the tragedy in Japan, some with a higher degree of confidence than others. Initially, you can count on a massive rebuilding effort as this situation evolves from catastrophic destruction to reconstruction over the next four or five years or maybe even more.
That will mean that different types of products and services will be a larger part of the mix of exports to Japan. They're going to need metals, minerals and a variety of other commodities for the reconstruction effort and these are the types of things, from an investing standpoint, that we feel will fit into the broader mosaic of commodities demand. We've seen strong demand up until this happened from developing countries and now you're adding demand for commodities of this type from the world's third-largest economy.
The economic impact on the U.S. in the short run is much more difficult to calibrate or anticipate. We saw initially the shock and sell-off followed by the predictable realization that maybe everyone overreacted in the first few days. Now we're seeing more selling in stocks and other products with exposure in that region. But generally, putting aside the obvious human tragedy, there probably won't be much of an impact on either the U.S.'s or the world's overall growth rate this year because, frankly, Japan wasn't expected to grow much this year even before this happened.
If anything, we could see some impact in the semiconductor space where I believe about one in five chips is manufactured. And we're sure to see some degree of impact in the auto industry considering the U.S. imports between 1 million to 1.5 million cars from Japan a year.
Q: With the both the Dow and NASDAQ enjoying strong growth in the past 12 months following a brutal cycle that hit its nadir in 2009, what are the most important lessons fund managers and investors have learned that they can draw from as the market improves?
SL: Trust. That's the most important thing we lost and it's the most important thing we need to rebuild. That was the ultimate lesson of the subprime mortgage debacle and the other issues with firms going bankrupt and everything else that went along with it.
We broke something that's very hard to replace and only now are we starting to see a very gradual move back by the retail investor. We've been a remarkable journey since the Dow bottomed out around 6,500 two years ago and through everything that happened last summer in Greece and Spain and Ireland, the market held on and got some clarity following the election. Now that some of the tax issues and regulatory issues are beginning to be sorted out, we're seeing a market that's still up 20% for the year.
But that's still mostly without much retail participation. Some fund flows had $200 billion to $300 billion taken out of them in the past two years and so far this year, maybe only $10 billion to $11 billion has been put back in.
The typical expansion or bull cycle runs between 50 to 55 months and we're just about at the 24 month mark. We're very cautious overall about the second half but still feel there's plenty of room for growth in this cycle. It's like when you're teaching your kids to walk. They grab your fingers and then eventually you take your fingers away and see how they do. That's where the economy is right now. Can it walk at 2.5% or 3% on its own without any additional stimulus?
Q: Baby Boomer are hitting retirement age at an unprecedented pace that’s only going to escalate in the next decade and, unfortunately, far too many of them are financially unprepared for retirement. What do you expect the newly retired and those rapidly closing in on retirement to do from an investing perspective to get their financial house order following all this economic instability and loss of trust?
SL: From a demographic perspective, Boomers are a very large group --- generally identified as those born between 1946 and 1964 -- that most people have sort of broken into two groups. And that make sense because the people in the older nine years of that group have a much different view and retirement horizon than the younger half.
One of the things that a lot of both sets of the Boomer group are telling us is that they had 50% of their investments in equities and over the last four or five years, they lost half of that. I'll even take a penalty hear for piling on by mentioning that maybe half of that group also got divorced so there's even bigger loss of assets and complication that's just part of life.
So many of them either had an advisor or were investing for themselves and they're now saying they're just going to go with bonds and give up on stocks because they sustained such huge losses.
But I don't think that's really what's going to happen. I think it will be the opposite. Most Boomers have or will come to the conclusion, unfortunately, that they can't rebuild their wealth with bonds or other investments at 2% or 3% or 4%. They know they're going to have to take some risks, work longer and expand their investing horizon. Instead of living to 70 or 75, they know they'll most likely live to 80 or 85 so they'll have some time to withstand some degree of volatility.
I think we're all going to be surprised by how willing Boomers are to keep the pedal to the metal despite all that's happened.
Q: Finally, what types of investments are you recommending and investing in for both institutional and retail clients?
SL: Some people are writing off the recent market strength as the beginning of the end or the end of the beginning and we think that's a little premature. We're titled toward technology, industrials, materials and other industries and commodities that should respond well to continued economic growth. However, we're sensitive to an inflection point we expect to see sometime in the next six to eight months.
Also, we're starting to see rising interest rates and the pressure on the economy is increasing to the point that investors might want to start thinking about protecting some of those profits they've earned from bonds. We are also advising people to invest in diversified commodities, not just oil and natural gas but agriculture and metals as we expect more demand and growth in developing markets.