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A case for choosing markets, not stocks

Harris Private Bank executive uses 'global macro strategies' to outperform benchmark index

FUNDS REPORTER

Forget about unearthing stocks with return potential. Forget about chasing a hot concept. Forget about sticking to a buy-and-hold approach.

Individual investors, especially those who make their own decisions, are better off using a "global macro strategy," argues Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

This strategy - sometimes referred to as tactical asset allocation - entails understanding the big picture and shifting money toward more promising markets, industry groups or asset classes, says Mr. Ablin, author of Reading Minds and Markets.

Investors can use low-fee exchange traded funds (ETFs) or mutual funds to play these themes, says Mr. Ablin, whose firm is part of Bank of Montreal's North American operations.

"We are one of the largest holders of ETFs in the country."

While the equity portfolios he oversees for individuals and families using a global macro strategy were in the red last year because of the market collapse, they lost "a great deal less" than the S&P 500's 35.5-per-cent plunge, he says.

We asked Mr. Ablin about his investment strategy, and where it is leading him now.

Describe your definition of a global macro strategy.

Global macro is a strategy that essentially is market selection rather than stock selection. So we are looking at deciding between markets. Do we want domestic stocks or foreign stocks. Do we want large cap or small cap? Do we want emerging markets or commodities? We try to put all markets on a level playing field to decide where the most attractive opportunities lie.

What is your outlook on the U.S. market now?

Five factors I lay out in my book to implement the strategy are: fundamental valuations, economic backdrop, liquidity, psychology and momentum.

My outlook is bullish for the next 12 to 18 months because valuations are reasonable for the U.S. market - even Canada, too. It seems as though the worst is behind us in the economy. ... Liquidity is enormous. Half of the value of the U.S. stock market is sitting on the sidelines in cash.

Psychology, which is a contrarian indicator, is good because most investors are skeptical. And momentum has moved to positive. We look at the S&P 500's 200-day moving average plus 5 per cent as positive.

What other markets do you like or are you avoiding?

We think the emerging markets are relatively expensive, and prefer investors look at international small caps. That is probably trading at a 40-per-cent discount to emerging markets. Investors can play this through the SPDR S&P International Small Cap ETF.

We have avoided financials for a while, but it looks like it is getting close to being a buy.

What about U.S. small caps versus large-cap stocks?

We think small caps are still expensive relative to large caps, given that access to capital is still somewhat constrained.

The troubles surrounding CIT Group [a U.S. lender to small- and mid-size businesses that may file bankruptcy protection] is just another headwind for small companies.

Why is a global macro

strategy better for individual investors than picking stocks?

I am not saying that stock picking in general is flawed. I am just saying that for individuals, they are at a big disadvantage trying to select stocks when institutions, who spend millions of dollars a year researching stocks and have dedicated analysts, have a leg up. To me, buying stocks as an individual is like buying a horse. The seller often has far more information than the buyer.

Can individuals really use your strategy effectively? Some people might call it market timing.

The reason why I wrote the book now and didn't do it 10 years ago - even though I have been doing this since 1990 - is because the tools are available for individuals to do this. There is availability of information and data through the Internet, Barron's or through other means.

Some people could perceive it as market timing. But generally, when we are investing in a market, we're looking at it play out for us over a minimum of 12- to 18-month periods. Market timers typically have a much shorter time horizon, in my view.

What advice would you give investors who are nervous about investing given last year's market collapse?

I do believe that [given the current market] environment, it is worth taking incremental risk right now. But you need to re-evaluate your risk profile given the volatile market place.

A lot of it has to do with when you need the money. I wouldn't invest in the stock market unless you could be without the cash for, say, five to seven years.

******

What investors should know

Basic materials

The sector, including chemicals, construction materials and mining, is sensitive to the business cycle. This is "one of the cheapest groups in the current market," Mr. Ablin says. "Its price-to-earnings ratio is low and expanding. It is positioned to benefit from increased global demand."

SPDR MATERIALS ETF

(XLB-NYSE)

Yesterday's close $28.57 U.S., down 24 cents

Technology

"Technology is also relatively cheap, and is a group that's exhibited some relative strength," Mr. Ablin says. "Technology balance sheets have little debt and their income statements generate steady earnings growth. Technology shares should continue to lead the market higher."

SPDR TECHNOLOGY ETF

(XLK-NYSE)

Yesterday's close $19.69 U.S., up 4 cents

Health care

The sector is "relatively cheap and offers high quality balance sheets and relatively predicable profit growth," Mr. Ablin says. This is the case, he adds, despite concerns about lower profitability, because Congress is debating a health care plan with potential U.S. government involvement.

SPDR HEALTH CARE ETF

(XLV-NYSE)

Yesterday's close $28.07 U.S., up 19 cents

© 2007 The Globe and Mail. All rights reserved.

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