2010 Investment Outlook–A woman’s perspective

I spent a lovely Monday afternoon at the downtown offices of Latham & Watkins, the 800 pound gorilla in the Los Angeles attorney space. Befitting a firm of their stature, the tastefully understated decor oozed money and power, and just getting through their doors practically required a state-sealed letter from the governor.

The purpose of my sojourn was to attend the 100 Women in Hedge Funds (abbreviated 100WHF) panel which Latham & Watkins graciously agreed to host. The topic up for discussion was the investment outlook for 2010. Before I proceed any further, the flier for all 100WHF events states that the contents of their events is not for attribution in the interest of member privacy. I completely understand that policy but I don’t think that what I’m about to report will be anything that anyone could consider an invasion of privacy or even remotely controversial. But just to be on the safe side, I won’t attribute quotes to any one panelist in particular. I don’t think this will hurt my coverage as similar sentiments and points of view were echoed amongĀ others on the panel.

About a half-dozen questions were posed to a panel composed of high-level women in the areas of portfolio management, manager and investment selection, business relations, and financial law. Following is a summary of the answers to some the questions posed. In the interest of clarity and readability I’ve stripped out the financial jargon–terms like “dispersion,” “capital structure,” and “counter-party risk.” You’re welcome.

Q: In your opinion, is the market improving?
The general consensus is that trading is definitely picking up and fund managers are glad to now have something to do. They’re seeing an increase in liquidity and an overall improvement in the technicals, but they’re concerned about the fundamentals.

The feeling is that the market has gone from significantly undervalued to fair-valued and that from here on out the market will need catalysts such as earnings growth and/or an increase in liquidity to propel it higher. One manager said she is starting to raise cash (good move!) and is also tightening her selection criteria. Others emphasized the need for nimbleness in adjusting portfolios.

Overall, the panel’s approach to the market going into 2010 is one of cautious optimism.

Q: In what areas will you be looking to invest in 2010?
One concern is the threat of inflation, not only in the US but globally. Some hedges against inflation that were cited were the stereotypical inflation hedges–commodities and TIPS (inflation protected Treasuries). More interesting is the use of emerging markets as a hedge. Growth in emerging markets, fueled not only by commodity and infrastructure demand but also by a hugely increasing consumer demand created by an explosion in capital growth, is expected to easily outstrip that of the developed nations.

Not giving specifics, the panel also felt that what worked this year probably will not work next year. Diversification was mentioned as a priority especially away from “momentum factors.” (I’m not sure how to interpret this.)

Q: What are the challenges and risks for 2010?
We all know how the credit crisis crushed the portfolio returns of retail investors. The way hedge fund managers convey the same thing is by saying that they are looking forward to increasing alpha. One way that some aim to do this is by getting the betas right.* (The exact mechanism on how that could be accomplished wasn’t specified and I’m not sure how it could be done considering that beta is not a fixed number.)

Besides inflation being a potential problem, other risks are being examined. Included is political risk, both at home (think health care reform and securities regulation) and internationally (North Korea, Iran, Venezuela, etc.). Riffing off the H1N1 problem, one panelist mentioned that a health pandemic could also be factor into the risk equation.

Q: What’s your opinion of the proposed regulation of the financial industry?
Would you believe me if I said that all of the panelists were in favor of regulation? I didn’t think so. In fact, I think I heard the word “cancer” mentioned, but I’m not sure…

The prevailing thought is that no matter how hard one might try, fraud can never be completely eradicated and that government intervention is an over-reaction to the Madoff-type scandals. Some panelists said that they’ve voluntarily increased their own in-house due-diligence and feel those measures more than adequately address the issue of investor risk.

Q: Do you want to venture any forecasts for the US economy?
Although the crystal ball is cloudy, some on the panel feel that we may have to inflate our way out of our massive debt, a commonly held sentiment in the investment community. Others think that the greenback is losing stature in the international community and could well be replaced by a basket of global currencies.

Only time will tell.

I thoroughly enjoyed my experience at the panel discussion and it was thrilling to meet so many intelligent, experienced, and knowledgeable women involved in the Los Angeles financial community. I hope that this article will raise public as well as institutional awareness of the high-caliber women involved with 100 Women in Hedge Funds which has active chapters operating not only in the US but in Europe and the Far East.

For further information about this organization, their mentoring programs, member services, and extensive non-profit work, please refer to their website: http://www.100womeninhedgefunds.org/

Disclosure: I’m on the board of the Los Angeles event planning committee of 100WHF, but maybe not for long after this article.

*Beta measures how much a stock moves in relation to a benchmark, typically the S&P 500.

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