Against a backdrop of economic uncertainty made worse by the second catastrophic hurricane to rip through the Gulf of Mexico and hit the oil and gas industry in Texas and Louisiana in a month; imminent change in leadership at the Fed; rising oil and gas prices and interest rates; and other potential worries for investors and advisors, we had the good fortune to talk with Quincy Krosby. Dr. Krosby’s perspective on economic and geopolitical events is unique, because, among other things, she brings her experience as a U. S. diplomat and her London School of Economics Ph.D. to her role as chief investment strategist at The Hartford. Kate McBride sat down with her in early October.
What is the No. 1 client issue that advisors are facing today? Nervousness among investors–about the state of the world, the state of the economy, leadership. All of these negatives conspire to keep an investor out of the market; they find one reason after another why this is not a good time to invest.
Is there an economic issue that stands out? Certainly energy costs are the most visible–they see it every day–they go to the filling station, so they know that prices are going up. Pretty soon we’ll be heating our houses and they’re going to see the effect of that, and at the same time you also have higher interest rates, which already have shown up on credit card debt, so more and more they’ll be seeing a bit of erosion of their personal disposable income.
Is there anything that advisors can do to help mitigate that in their clients’ portfolios? Yes. One of the things that I think is important is the diversification of the portfolio because nobody knows when the market in equities, for example, will turn up. What is that day that, for some reason, the market turns up and it’s the beginning of a cyclical rally? We know that very often that first leg up or second leg up will come amid a negative backdrop, when you least expect anyone to have any optimism. That’s one reason retail clients come in at the top of the cycle year after year.
So, keep the portfolio diversified, all asset classes, stay that course all the time? Stay that course, yes. If you take a look at the best returns, you know they come from some of our leading universities, endowments, pension funds; they are always diversified across every asset class. Of course, they rebalance accordingly. What happens is the emotion is taken out of the equation so you don’t have to wade through your emotions to get yourself into one particular asset class–it’s almost automatic. So, again, when the professional investors see something that we just don’t see, and many times they don’t even know that other investors are seeing it, but for some reason a particular asset class sees a liquidity-driven rally and sometimes a more sustainable rally, the client should already be in that particular asset class. It doesn’t mean that every part of that portfolio is going to be performing well. But over time it works.
Do you see opportunities long-term coming out of Hurricanes Rita and Katrina? Absolutely. You are going to see a major rebuilding effort. You’ll hear speculation that people have left, they’ve left for good, but one thing we know: when things start turning up, and they will, you’re going to see people going back, you’re going to see new people going down to that region because of jobs that are created as a result. What you’ll eventually see is a kind of positive momentum. Obviously, we’ve all read about the logical sectors that will be positively affected, but that will all lead to the economy doing very, very well. I think it’s going to be major stimulus for the overall economy in the U.S., not to mention the local ramifications.