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Confronting shrinking interest rates

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You know the investing climate is unusual when a stock’s dividend yields more than bonds issued by the same company.

Take Indianapolis-based oil refiner Calumet Specialty Products Partners LP, whose dividend-paying stock had an annualized yield in early December of 8.23 percent, while its bonds yielded 7.21 percent.

Many better-known, blue-chip stocks crossed the same threshold as bond prices continued to rise last year. An overheated fixed-income market would be yet another challenge for income-seeking investors, who’ve had few low-risk options in the era of rock-bottom interest rates.

yield_table.jpg“Without question, this is the hardest environment investors have seen, probably in our lifetime,” said Terry Weiss, president of Wallington Asset Management, an Indianapolis firm that handles more than $400 million for wealthy individuals. “And it’s coming at a difficult time because, what do you have? You’ve got a lot of people who are retiring.”

Local investment pros have different strategies, but they offered a common thread of advice: Don’t assume fixed-income means no risk.

“The last place you want to experience a loss in your portfolio is in the portion you thought was the safe piece of it,” said Brad Cougill, a partner at Indianapolis-based Deerfield Financial Advisors, which oversees $476 million for clients.

Investors poured more than $456 billion into global bond funds through Dec. 5, and $72.4 billion of that went into high-yield funds, or junk bonds, according to Boston-based EPFR Global, which tracks fund flows.

Money gushed harder toward bonds than in 2009 and 2010, when the total inflow was $354 billion.

The risk for bond investors is that yields are so low, even a slight rise in interest rates could erase the return, and continually rising rates could erode principal.

Cougill thinks the bond market will see some volatility over the next year, and he dispensed the same advice about sticking to an asset-allocation strategy that one often hears in the context of stock-market swings.

“I think people need to be prepared for that and know what they’re going to do,” he said.

With top-rated bonds yielding less than 3 percent, high-yield, or junk bonds became more attractive in 2012. Many of those bonds were held in new mutual funds and exchange-traded funds (which trade like stocks).

Winthrop Capital Management in Indianapolis looked closely at funds yielding 6 percent and found that most of their holdings were rated B or BB and yielded less than 5.5 percent. The remainder, which drove the overall return, went to bonds with double-digit yields.

“That’s the toxic stuff, and it has a high probability of defaulting,” Winthrop President and Chief Investment Officer Greg Hahn said.

Hahn isn’t against high-yield investing, but he said, “The question to ask is whether you’re getting compensated adequately.”

From a historic perspective, the answer to that question is no, he said. The yield spread between 10-year Treasury bonds, the safest investment, and junk bonds was near its tightest level in a decade in early December, he noted.

With interest rates near zero, the duration of a bond is as important to consider as credit quality, Weiss said. He doesn’t think interest rates will rise soon, but like other local wealth managers is careful not to invest in bonds going longer than five years.

Retail investors should look for bond mutual funds with durations no longer than five years, Weiss said. And given the low yields, he said, “I would be certain to be investing in mutual funds which have a very competitive fee structure.”

Fear of stocks justified?

The flight to fixed-income reflects a wariness of the stock market that’s persisted since the 2008 financial crisis.

“A lot of people are still running scared of the world, of the economy, of Washington,” said Don Woodley, principal at Woodley Farra Manion Portfolio Management in Indianapolis. “The safe industry is doing a bang-up business.”

Deerfield clients’ stock-market fears prompted the firm to adjust portfolios more toward high-quality bonds last year, Cougill said. As a result, total returns ranged from 5 percent to 8 percent.

“The stock market is up higher than that,” Cougill acknowledged. “But clients are saying, ‘Well that’s OK. We’d rather give up some of that upside.’”

Money flowed out of stock funds last year even as the Standard & Poor’s 500 posted double-digit returns. Investors pulled $67 billion out of equity funds through Dec. 5, according to EPFR Global, while the S&P 500 index returned 16 percent through Nov. 30.

Woodley, for one, thinks investors are missing an opportunity by sticking with what they see as safe havens. “Somehow people equate bonds with safety, and that’s not necessarily the case.”

Another option for investors looking for low-risk income is dividend stocks. Woodley, whose firm set up a dividend-stock mutual fund in 2011, looks for companies that not only pay dividends but increase them.

“It doesn’t have to be every year,” he said. “In a good year, they should be increasing their dividends and paying more and more to you.”

Utility stocks are an obvious source of dividends, and some yield 4.5 percent to 5 percent, Woodley said. (Dividend yield is the annual dividend per share divided by the share price.)

Utilities wouldn’t be attractive without the regular payments to investors. Earnings might grow 3 percent to 4 percent a year, Woodley said. “That’s good growth for a utility.”

Woodley also likes counter-cyclical companies like diaper and toilet-paper maker Kimberly-Clark, which has raised its dividend each of the last five years. The company’s earnings have also risen, an average 10 percent over five years, he noted.

“That growth is not spectacular. It allows an investor to rest comfortably,” he said.

Money managers like preferred stock because the dividends must be paid, even if earnings drop and the company cuts payments to common shareholders.

Preferred stock can seem as safe as a bond because it’s assigned a maturity date and par value, but there are risks, such as buying close to the call date, Woodley warned. “People can actually lose money if they buy the wrong preferred stock.”

Banking is another place to find rising dividends, though some money managers rule out the industry as too closely tied to potential economic shocks. For Hahn, who also likes preferred stock, banks are the only option to consider after utilities.

Each bank has a different risk profile, based on its particular niche and business strategy, Hahn said, so there’s no reason to rule them out.

“For decades, we just painted the brush over the whole industry,” he said.

When it comes to stocks in general, Hahn, who advises mostly institutional clients, is an uber-bear. At best, he thinks stocks will stay flat until global demand picks up, and he doesn’t think that will be in 2013.

“There really is no scenario we can come up with where stocks go on a roar,” he said.

Kip Wright, managing director at Kirr Marbach in Columbus, takes the opposite view.

“I think equities have the best potential going forward,” he said.

Finding sub-investment-grade bonds with upside potential became more difficult last year, he said. Yet investors still want returns of 5 percent to 7 percent, he said. “The only place you’re going to get those returns is by layering equities into your portfolio.”

Before the 2008 financial crisis, clients were willing to ride out events like the federal government’s fiscal cliff, Wright said. Lately, they can think only about locking in short-term returns.

“Looking for those guarantees are costing people a lot of money in this environment,” he said.•

This story originally appeared in the Indianapolis Business Journal.

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  1. Am I the only one who sees that the City is essentially giving away the MSA site AND giving millions to build new buildings on the site when this site would be the perfect place for the Justice Complex? Across from City-County, check; keeping it centrally located, check, etc. It's my understanding that the GM site must be purchased by the City from Motors Liquidation Company. STOP WASTING WHAT WE ALREADY HAVE AND OUR TAX DOLLARS! The Ballard Administration has not been known for it's common sense...never voted for him and never will!

  2. This guy sounds like the classic molester/manipulator.

  3. Louis D. Brandeis was born in 1856. At 9 years of age it would have been 1865. The Brandeis family did not own slaves. My source Louis D. Brandeis: A Life, by Melvin L. Urofsky.

  4. My name is Matthew Lucas Major, I recently went through a jury trial in Bloomington , In. It was the week of Feb 19-21. Although I have been incarcerated since August 5, 2014. The reason I 'am writing to you sir is on the 21 of February the jury came in with a very excessive and wrongful verdict of guilty on 6 child molesting charges against my daughter who was 9 at the time I was accused. I also had 2 other Felonies one of Intimidation and 1 of Sexual Vicarious Gratification. Judge Marc Kellam on the second day of trial gave me a not guilty on those 2 felonies. The jury was sent out during that time and when brought back Judge Kellam told them to not concern themselves with the 2 Felonies that he ruled on them. They were told to not let evidence they had already heard influence there verdicts. I never in my life touched any child sexually and definitely not with my own daughter. When I was arrested Detective Shawn Karr told me I would be convicted guilty just on my daughters word even without evidence. That's just what happened. my public defender did me so wrong he never once proved to the court and jury all the lies the child told, and Jeremy Noel my public defender could of proven the lies easily. The stories in Serenity's depositions and Forensic interview changed and were not consistent as Prosecutor Darcie Fawcett claimed they were. Yet my attorney never mentioned that. The facts that the child accused me of full penetration in her vagina and rectum was proven lies. Doctor Roberta Hibbard of Riley hospital in Indianapolis confirmed Serenity's hymen intact, no scars, no tearing, no signs of rape to her. Yet my attorney didn't use that knowledge . the DNA was all in my favor. I tell you I will spend my entire life in prison going through rape and beatings etc. even Judge Kellam abused his authority by telling the jurors to listen and believe what the prosecutors side in evidence like my daughters testimony. In one interview with the detectives my daughter got flustered with her mom and said on camera " I'm saying what you told me to mom"!! Yet Mr. Noel said nor did anything to even resemble a defense attorney. Judge Kellam allowed edited version of a taped conversation between the child and her mother. Also Judge Kellam allowed the Prosecutor too bring in to my case a knife found under my seat, the knife wasn't part of my case. She was allowed by my attorney and the judge to put a huge picture of it on the screen and huge picture of my naked privates in a full courtroom and open court. Ms. Fawcett says to jury see how easy Mr. Major could reach the knife and cut his Childs throat. Even though I had no weapons charge against these cases. This gave the jurors prejudice thought against me thinking I threatened her with that knife and how scared she would of been knowing i could get it and kill her. On my sentencing court March 19, 2014 my public defender told Judge Kellam he wish to resign from being my attorney and wished for the court to give me outside council to file a error to trial or appeal. We were denied. Now after openly knowing my public defender don't want to represent me he has to. Well when as parents we make our kids clean a room when they really don't wish to, well the child will but don't mean she will do a good job, that's where I'm at with Mr. Noel. please dont ignore mine and my families pleas for your help . we have all the legal proof you could need to prove Im innocent. Please dont make my spend years in prison innocent when you can fix this wrong. Im not saying Im a perfect man or that I was a perfect dad to my 2 children none of us are. Ive made some bad choices in life and I paid for them. But I didnt ever touch or rape my daughter . I love my children with all my heart. And now through needing attention and a ex-wife who told my granny several times she wish she could put me in prison to get me out of their lives. Well my ex finally accomplished her goal. Sad part is she is destroying our daughter with all this horrific lies and things she taught my daughter to say. My daughter will need therapist to ever hope for a chance of a normal life after what she had done to her by her mom and their side of the family. My daughter told everyone even on stand she had a dream months before i supposedly molested her in this dream I was molesting her and when I finally did it matched her dream perfectly. She admitted to watching movies about little girls being molested and watching U-Tube videos about child molesting all before it happened supposedly to her. Doesn't that sound very unusual that a non molested 9 yr old would need to know so much about being molested? The only reason I could think a 9 year old would need so much information is to be prepared to know what to say and be able to say how it felt what took place etc.. So when questioned by authorities she would be prepared. And there again sir if a parent is pre grooming a 9 year old child she would need intimate details . Like telling her daughter about a couple moles on my private area. The child admitted to sneaking my cell and looking many many times at nudes of me and my girlfriend even one where my penis was entering my girlfriends vagina. In that picture my moles are obvious. Yet when prosecutor showed everyone in court my privates and pictures of the moles she said the only way the child would know about them is if she saw them for herself. My attorney once again said nothing about the pictures my child saw. Or could a ex-wife be able to describe my moles to help her case against getting rid of me? I beg you help me. This is my very existence. Ive lost everything , a good job, a wonderful girlfriend, my freedom, but worse thing Ive lost is my children. They were my reason to get up every morning and strive to be better. The wonderful bond I had with my Serenity is gone. After this I would be afraid to even hug her for fear of what next can they do to me. I'm not afraid to tell you I sit here in this cell and try to hold back my tears. Everyone knows you cant show weakness in prison. My life has already been threatened here at Wabash Valley Prison. After only 3 days of arrival. I was tricked into signing a waiver now Im in G Block General Population with 6 child molesting felony charges. Mrs. Hart as a 18 year old I almost died hooked to machines in hospital almost 1 month and now I know that fear was childish compared to this . I cant help but put emotions in this, after all Mrs. Hart Im human and God help Me I never been more afraid in my life. I didnt hurt my little girl I didnt touch her sexually. As much as it shreds me and fills my mind what Im facing I worry more about my mom and granny because of their great love for me mam they are suffering so deeply. I aint done this things but my loved ones suffering right along beside me and If you take my case you will be in essence freeing them also. I sent momma this letter and asked her to email it to you. I'm scared I have been done so unjustly by our legal system and I need you to fix this and give me freedom. I ask you please don't just ignore my pleas. Here in America its nice to be able to trust our legal justice system, well they destroyed my and my loved ones trust in our justice system . And I'm trusting in You !!! My entire family is suffering this nightmare with me. My 77 year old granny had a stroke and isn't doing so well. My single mother that raised 3 kids alone is dying from Lupus and since my arrest has stayed so sick and weary. Our lives torn to peices by a government I was taught I could trust in. my momma has tried so many innocent project and wrongfully accused and cant get anywhere. please please help me. A quote from the late Nelson Mandela: To be free is not merely to cast off ones chains, But to live in a way that respects and enhances The Freedom Of Others. I have Faith in you and your clinic to cast my chains off and give me freedom I do deserve as a wrongfully accused Man, son, brother, father, friend. Matthew Major DOC# 246179 Cause # : 53c02-1308-FA-000779 God Bless you. Please contact me with your decision so I know you made a life changing decision for me , just please at least write me so I know you care enough about your citizens to respond to cries for your help. You can speak openly with my mother Charlotte Spain (828) 476-0406: 71 Lakeview Dr. Canton, NC 28716 Thank You Matthew Major I know yall get thousands of request and inmates claiming innocence, and each person who are innocent deserve to have organizations like yours willing to fight for them and I give yall so much Thanks and I thank God everyday yall are out there caring enough to help free the innocents. Since discovering firsthand how easily lives and families can be destroyed by Poor Defense attorneys not doing their job . And Prosecutors allowed to do as they please in court

  5. Frankly, it is tragic that you are even considering going to an expensive, unaccredited "law school." It is extremely difficult to get a job with a degree from a real school. If you are going to make the investment of time, money, and tears into law school, it should not be to a place that won't actually enable you to practice law when you graduate.

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