In his latest newsletter to clients, portfolio manager Gary Greenbaum urged them to vote in the presidential election -- but not with their investments. "Most of our clients say, 'What impact will the presidential election have on my investments?'" said Greenbaum, a fee-only certified financial planner and chartered financial analyst with Greenbaum and Orecchio in Old Tappan, N.J. But if history is any guide, he has concluded, even this contentious and presumably close election won't have significant effects on the stock and bond markets in the long term. That's not to say that some individual stocks won't spike briefly once Bush or Kerry wins. "It does matter, but you can't bet on it," said Greenbaum, who's been managing money for 21 years and whose firm has $170 million under management. "You've got to be correct six months in advance." The noise and confusion Wall Street generates during election season usually enriches those who are selling investments, not those buying them, he said. Some investors are nervous that John Kerry, if elected, will quickly try to undo Bush's big tax breaks for capital gains and dividends. However, that isn't a given, especially if Congress, as expected, remains dominated by Republicans. "Kerry winning by itself is not as powerful as Kerry getting a mandate," said Lewis J. Altfest, president of L.J. Altfest & Co., which manages $250 million. He and other portfolio managers interviewed believe that investors are better off creating a diversified portfolio and sticking with it, before and after elections. "You start to get into market-timing," said Ron G. Heath, CFP, CFA, who runs Heath Financial Advisory, in Encinitas, Calif. He said that holding investments for the long term reduces trading and tax costs.
The advisers have some academic research to support their view. A September study by David G. Booth, CEO of Dimensional Fund Advisors, a California mutual fund company run by some of the nation's top financial economists, concluded that election-year results don't produce enough change to merit a change in investment strategy. The markets tend to be weak in the months before an incumbent loses re-election and strong before he wins. But the study found that whether the incumbent wins or loses, investment returns are close to historical norms in the years following elections. Managers who tune out the election in favor of a steady asset-allocation strategy, however, are still striving to improve returns in this stagnant market by taking advantage of certain long-term trends. Some are looking beyond stocks and bonds and toward commodities and oil-and-gas limited partnerships for higher returns. Neil Hokanson, president and portfolio manager with Hokanson Capital Management in Solana Beach, Calif., said he is seeking to tweak portfolios -- and his clients' outlooks. "We think we're in a low-rate return environment, maybe for an extended period of years," he said. "We're trying to adjust clients' expectations. It's a tough market. It's a nickels-and-dimes market." President Bush's tax cuts and the war in Iraq have helped to create the nation's largest deficit. "Bush has been a very free-spending president," said Hokanson. "Markets don't like that." But there is good news, he said. "Corporations are flush. They have a lot of money to buy back shares and pay dividends." Hokanson believes the health care sector will outperform the market, because of the country's aging population. Among his favorite companies are Michigan-based health services provider United American Healthcare ( UAHC) and assisted living provider Sunrise Senior Living ( SRZ).
Because he expects oil prices to remain high, Hokanson said that drilling and related companies are now attractive. He prefers oil-well services and equipment suppliers BJ Services ( BJS), Noble Corp. ( NE) and Nabors Industries ( NBR). Also in his portfolio are foreign company stocks purchased on U.S. stock exchanges through American depositary receipts, or ADRs. Hokanson favors two telecommunications companies: Deutsche Telecom ( DT) of Germany and Spain's Telefonica Moviles ( TEM). Hokanson said his firm is also looking at more volatile investments such as commodities and hedge funds. He described hedge funds as "real black box, a pretty scary area," because most rely so much on leverage. "We're in the process of due diligence." He said that if hedge funds continue to grow in popularity, however, their returns will start to decline. In this rising interest rate environment, Heath is sticking to bonds with short maturities. To improve his returns, he is investing in dividend-bearing stocks he once considered stodgy. "I bought Coca-Cola ( KO) recently," he said. "It's been 10 years since I thought of buying Coca-Cola." The stock currently has a dividend yield (the annual dividend divided by the share price) of 2.5%. Heath also likes some other dividend-paying blue chips that have stumbled lately, such as Pfizer ( PFE) and Colgate-Palmolive ( CL). He is considering buying Merck ( MRK), after the beating the stock price has taken due to the recall of the arthritis drug Vioxx. That has, in turn, made the dividend yield attractive at 5.0%. "A dividend of 5% from a major pharmaceutical is unheard of," he said. After successfully investing in a tax-advantaged, oil-and-gas limited partnership himself two years ago, Heath said he might add such partnerships to his portfolio mix for wealthy investors who qualify. Because small-cap stocks have outperformed the markets for several years now, Altfest is scaling back on them, and he is adding international investments.
"We like Japan," he said. "Japan is serious about profitability now." Because it supplies more capital goods to China than the United States does, he said, "It's a better play on China than China is." Altfest uses ( MJFOX) Matthews Japan Fund and ( FJPAX) Fidelity Advisor Japan Fund. He also like other funds with an international bent, such as ( TBGVX) Tweedy Browne Global Value, which invests in Europe, and ( LLINX) Longleaf International, which has some Japanese holdings. Altfest believes that the run-up in commodity prices has peaked and that rapid inflation might not come to pass. "Higher inflation is leading to slower growth," he said, "and that is taking the edge off inflation."