“We’re not paying attention,” John Mauldin, president of Millennium Wave Investments, said of investors during a Strategic Investment post-conference interview with AdvisorOne on Friday. “As humans, we tend to project current trends out into the future, which is a dangerous and destructive thing to do.”
In the folksy style that is his trademark, Mauldin likened the current investor mindset to the person who jumps off the top of the Empire State Building and at the 72nd floor thinks all is going well.
“This conference tells us uncertainty in the market is real, and it’s imperative for investors to look for strategies that thrive in uncertainty and money managers that have the tools to adopt to a potentially rapidly changing environment,” added Jon Sundt, president and CEO of the alternative investment firm Altegris, a co-sponsor of the conference with Milennium Wave.
Sundt said he has a long allocation to equities currently, but his key is diversification.
“If I’m wrong about interest rates and my equity allocations, then my beta plays will lose money,” Sundt said. “It’s a stock picker’s market, and as a result our long/short equity performance is strong.”
As to what else Sundt likes in the alternative investment space, he notes that managed futures and global macro allocations have struggled recently, but it was to be expected given what they are designed to do.
“Bernanke has said he will hold interest rates low, so I don’t see how traditional fixed income could possibly be a good play,” he added, referring to Fedreal Reserve chairman Ben Bernanke.
Playing off of Sundt’s comments, Mauldin (left) said we live in a “binary world,” one in which the debt and deficit are dealt with, or they are not, but “all other decisions are derived from that.”
Echoing Doubleline’s Jeff Gundlach from earlier in the day, Mauldin said he “is no perma-bear.”
“I came on stage to REM’s ‘It’s the End of the World as We Know It,’” Mauldin quipped. “The key is ‘as we know it’ and as we know it sucks. I’m sick of governments running deficits. I’m sick of central banks messing in the markets. I’m sick of secular bear markets. All that stuff is bad, and it’s about to be cleared out.”
“The real question is Europe,” Sundt said. “The situation there can accelerate and unravel quickly. In the United States, I see stocks that are overvalued, like high-flying tech stocks, and some that are undervalued. Investors should be defensive, but they can’t sit in a bank or money markets.”
So where are they finding alpha?
“For me, it’s all about income producing investments,” Mauldin answered. “Hedge funds, managed futures; stocks will become cheap again and we will begin to test the bottom.”
“For me it’s all about risk versus reward,” Sundt said. “Over the last 12 months equities as an overall asset class we only up 1%, and that’s with significant volatility. I’m not saying it’s not worth it, but investors must be prudent.”
Sundt reiterated that the managers in the firm’s long/short funds are bottom-up stock pickers, and he feels it is a stock pickers’ environment.
When challenged on the poor performance of long/short funds before, and during, the economic crisis, Sundt responds, “Most of those long/short managers were not running true long/short strategies; they were 130/30 guys in mutual fund families. In order to successful, firms must have experienced sub-advisors that know shorting strategies.”