Good news for retirees as these 'low-risk' investments go on sale

MW Good news for retirees as these 'low-risk' investments go on sale

By Brett Arends

This stampede away from certain assets has created a buyer's market

For decades, certain types of investments have been recommended for "widows and orphans," and other risk-averse investors such as retirees, because of their supposedly lower risk profile.

These include cash and deposit accounts, government bonds, investment grade corporate bonds, real-estate investment trusts, stocks in regulated utility companies and the stocks in companies that make and sell things we buy or use every day (from household cleaners to breakfast cereals and soft drinks).

The good news this week? All of these investments are now so out of fashion on Wall Street that it is almost impossible they won't prove to be a bargain.

The source is one of this column's favorite monthly reads, the authoritative monthly "global fund-manager survey" from BofA Securities. Strategist Michael Hartnett and his team routinely poll honchos running many of the world's biggest pension funds, mutual funds, hedge funds and endowments to find out what they think about markets - and where they have their clients' money.

These people move the markets, tend to act as a herd and represent conventional (elite) wisdom in the financial markets. So the survey often gives us a great insight into why markets have been acting the way they have. It can also show us where the dangers are - and the opportunities. When these people all agree on something, and they have all bet their clients' money heavily the same way, it suggests sentiment, and prices, may have gone too far in one direction. Often the smart move is to take the other side of the trade. (The fund-manager survey drives this column's regular Pariah Capital feature.)

This month, BofA Securities polled more than 200 fund managers, handling a total of $638 billion in client assets.

Fund managers are now heavily underinvested in pretty much all low-risk asset classes, BofA reports. They hold historically low levels of their clients' money in cash (meaning short-term paper, such as Treasury bills), REITs, utilities, bonds, and so-called "staples," meaning the stocks of companies that make and sell basic consumer products.

The survey shows the biggest one-month drop in allocation to bonds in over 20 years. Not since July 2003, when a bond bubble was bursting, have money managers tried to sell so many bonds so quickly. Their allocation to bonds is now at the lowest level since November 2022, the survey reveals.

The survey also shows sharp one-month swings out of cash and staples.

Utilities and REITs have been out of fashion for a while. Veteran utilities analyst and investor John Bartlett, co-manager of the Reaves Utility Income Fund UTG, says in his long career the Wall Street attitude toward the sector has been worse only once. "In 1999," he says. "Maybe, a little." That was the dot-com bubble.

This stampede away from low-risk assets has created a buyer's market. This is why you can buy one-year CDs and three-year blue-chip corporate bonds paying around 5.5% interest, even though Wall Street's inflation expectations are only around 2.5%.

It's also why the utility, REIT and consumer-staple sectors have been lagging the S&P 500 so much.

Historically, all three have been low risk. Regulated utilities make up a unique sector: The math and economics work in reverse from most other industries, because the companies and their regulators start by agreeing on the regulated profits and returns on capital required, and from that calculate costs, investments and ultimately prices.

REITs have often been lower risk than the rest of the stock market, but with occasional crashes during real-estate crises: The latest has affected office buildings, many of which have been devastated by the consequences of the COVID lockdowns.

And consumer staples have benefited from a number of advantages that have lowered their risks. The industry is typically dominated by giant companies with incredibly strong brands (think Coca-Cola $(KO)$, Procter & Gamble $(PG)$). Cash flows are small and regular, rather than big and lumpy. And people carry on buying their favorite soda, and their preferred brand of deodorant, razors and toilet paper even in a recession.

To be fair, in today's expensive stock market, none of these sectors looks objectively dirt cheap. But according to FactSet, the utilities sector has a forecast dividend yield of 3.8%, meaning you can expect $3.80 in dividends over the next year for every $100 you invest, while the real-estate sector has a forecast yield of 4.8%.

Bottom line: This sets up an interesting opportunity for Aunt Sally in Dubuque. While markets and the future are completely uncertain, she could invest 20% each in, say, the Goldman Sachs Access Treasury 0-1 Year ETF GBIL, and the Vanguard Total Corporate Bond VTC, Utilities VPU, REITs VNQ and Consumer Staples VDC ETFs, and on current forecasts reasonably expect to earn around 4.3% in dividends and coupons on her money in the next year. Plus, the 60% of the portfolio invested in stocks would - or should - offer growth, at least to offset inflation and possibly more.

As ever, people have to do their own homework and their own due diligence. I can only highlight opportunities. I'm not managing money.

Meanwhile, the fund-manager survey also offers some more ominous news.

Fund managers are now so optimistic about global growth and stock markets that they are positively giddy. History says this level of bullishness is often a sell signal. Hartnett and his team write that sentiment is "not quite at 'close-your-eyes-and-sell'" levels," but adds that stocks and other risk assets are now much more vulnerable to a pullback. (The survey, by the way, was conducted a week ago - just before the recent selloff.)

Fund managers, they write, are at their most bullish, and most heavily invested in stocks, since...er..."January 2022."

You may remember that was a stock-market peak, before inflation, interest rates and Ukraine sent prices plunging here and around the world.

-Brett Arends

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April 18, 2024 07:00 ET (11:00 GMT)

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