The “Masters of Allocation” Rediscover Stocks in Year Five of the Bull Market

My friend the hybrid broker / advisor at LPL Financial – let’s just call him Danny – has been as close to fully invested over the last year as he could be in most accounts.

He’s a mutual fund guy, usually he buys C shares for smaller brokerage clients and institutional share class funds for the wrap accounts he manages. He’s got almost no bond funds and very little cash across his book of business, based on our last conversation a few weeks ago. So it must be hilarious for him to be reading in Barron’s this weekend that the firm he works for has just slashed its “official” cash allocation recommendation down from 20% to just 10%.

For some background, LPL is an independent broker-dealer and corporate RIA at which some 13,000 advisors hang their shingle. To think that it’s possible that even half of them had heeded the home office’s call to be one-fifth in cash to begin with is kind of amusing. To be running an asset allocation model carrying that much in money market funds, you better have some kind of classified intel that the next Lehman moment is right around the corner.

The Barron’s cover story this weekend, by Karen Hube, is a good one. It tells the story of how family offices, trust banks and other wealth managers are changing their allocations away from heavy cash and bonds and further toward equities – US and International. I know there are several pundits who have been banging a shoe on the table that this is not happening (DO NOT use the “R” word!) so I’ll just let the data do the talking…

Some tidbits from Barron’s…

Allocation Recommendations:

On average, the wealth managers are recommending that investors put 29% of their money in fixed income, down from 34% a year ago, according to an annual survey…At the same time, wealth managers are recommending an average allocation to stocks of 48%, up from 45%


Data on mutual-fund flows in the first weeks of the new year suggested that the rotation was starting to happen, with net inflows into stock funds running at a vigorous $29.5 billion a month

The push into foreign stocks is “dramatic”:

The average exposure to foreign stocks is now close to 18%, up from a low of 13% in last year’s third quarter.

Constellation Wealth, an independent New York-based firm, had 20% in foreign stocks in early 2011; 10% a year later; and recently, 25%. Multifamily office GenSpring went from 13% to 8% and then up to 23%. Private-banking stalwart Northern Trust had 13% in 2011, pared to 10%, and now holds 23%. Wilmington Trust, UBS, Neuberger Berman, HSBC, and Atlantic Trust also have developed a robust appetite for foreign stocks.

The sell-down of bond overweights has just begun:

To fund bigger stock positions, two-thirds of our firms have reduced overall fixed-income holdings since a year ago; 75% are, in fact, currently underweight fixed-income positions. William Blair cut its exposure from 30% to 15%; GenSpring has gone from 42% to 23%.

A resilient stock market and the Recency Effect work their magic on the Chief Strategist types:

“We are in the initial stages of investor psychology changing…right now the change has more to do with concern over rising interest rates than a positive view toward stocks.” But the shift toward stocks will become more pronounced “when investors realize a secular bull market will be the story for the next three to five years.” – Chris Hyzy, chief investment officer at U.S. Trust.

“We now see the glass as half-full rather than half-empty.” – Gordon Fowler, CEO of Glenmede, an independent investment firm based in Philadelphia.

Right on time, Gordon, right on time.


More Stocks, Fewer Bonds (Barron’s)

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33 Times, You Poor Dumb Bastards (TRB)

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