| INVESTORS shifted from full-blown fear as the stock market plummeted in 2008 to a mood of rampant risk-taking after the market took off in March 2009. They have now become nervous again, or so the conventional wisdom goes. There is certainly some truth in it. Amid growing concerns of another global economic slowdown, investors have rushed into ultrasafe Treasury bonds in recent months, pushing yields down to an astonishingly low 2.6 percent from 3.8 percent in late April. But that's not all that's going on. "Simply focusing on low Treasury yields paints a distorted picture of this market," said Marilyn Cohen, president of Envision Capital Management in Los Angeles. For instance, while investors have been retreating to government bonds, they've also been pouring new money into so-called risk assets like junk bonds, emerging-market debt and emerging-market stocks. With so much attention being paid to the Treasury market, these trends have gone largely unnoticed, Ms. Cohen said. In fact, this year through Wednesday, a net total of $21 billion flowed into mutual funds and exchange-traded funds that concentrate on stocks based in fast-growing developing economies like China, India and Latin America, according to Lipper, the mutual fund tracker. By comparison, investors pulled a net $8 billion from domestic equity funds, even though domestic stocks are considered a core holding. Meanwhile, high-yield or junk bond funds — which were crushed in 2008, when investors fled assets that exposed them to credit risk — have attracted around $4.5 billion in new money. James W. Paulsen, the Minneapolis-based chief investment strategist for Wells Capital Management, adds that, at least in comparison with the dark days of 2008, there are other signs investors aren't as risk averse as the trend in Treasury yields may imply. He noted that even though investors seem genuinely concerned about the health of the recovery, two of the best-performing sectors this year have been industrial stocks and shares of consumer discretionary companies, which are both economically sensitive areas of the market. "That says that this 'risk on, risk off' environment we've been in is fading a bit," he added. If the mood of the market is no longer so black and white, what are the investment implications? At the very least, it means that asset classes may not move in lock step with one another and that diversification — the strategy of owning different types of assets at all times — still matters, said Lewis R. Piantedosi, a portfolio manager at Eaton Vance Management in Boston. For instance, two years ago, when fear dominated the market amid the global financial crisis, virtually every type of investment — with the exception of Treasury bonds — sank as investors headed for the sidelines. Then, last year, starting with the market rally in March, virtually every type of asset rebounded in coordinated fashion. In both years, investors were left wondering whether diversification worked. But that's not been a problem so far this year. Investors have witnessed a wide range in performance among asset classes, from the 23 percent surge in long-term government bond funds to the 2 percent gain in emerging-market stock funds to the 3 percent decline in the Standard & Poor's 500-stock index to the 5 percent fall in European shares. Brian G. Belski, chief investment strategist at Oppenheimer, noted that this bifurcated market, where investors are simultaneously seeking the safety of Treasury bonds and capturing the growth of emerging markets, might simply be a case of people "buying what's been working." For example, both emerging-market stocks and emerging-market bonds have outperformed domestic equities, just as Treasury bond funds have. According to Morningstar, the average diversified emerging-market stock fund is up 2 percent this year, while domestic shares are down around 3 percent. The typical emerging-market bond fund is up more than 11 percent. THIS environment would seem to call for a barbell-like strategy with one's portfolio, Mr. Belski said. He suggests betting simultaneously on the growth potential in a recovering global economy — for instance, by investing in those economically sensitive sectors of the market — while also holding more defensive shares like dividend-paying blue-chip stocks. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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