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Where to Invest When Safe Havens Crumble

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Many retirement savers who were spooked after the 2008 crash are finally feeling confident enough to move their cash into stocks and bonds — even during the latest two-week period of market volatility, according to Bank of New York Mellon analysts who spoke at a press briefing on Thursday.

But where are the safe havens? Current volatility is centered on the traditionally safe U.S. Treasuries market, and gold futures are now residing in negative territory, so investors who are saving for retirement are wondering where to put their money.

“There is no such thing as the perpetual safe haven,” said Anjun Zhou, head of multiasset research with Mellon Capital Management, who instead keeps an eye out for markets that are currently outperforming. “For decades we thought Treasury bonds were the safe haven, and look at what’s happened in the last two months.”

‘A Buying Opportunity’

Save havens may be a moving target these days, yet Americans’ confidence in the U.S. economy is at its highest point in five years, BNY Mellon Investment Management CEO Curtis Arledge asserted, noting that people who were in cash a couple of years ago now want to invest despite the recent bond market selloff.

“People are seeing this time as a buying opportunity,” Arledge said.

On Tuesday, the Conference Board reported that its consumer confidence index jumped to 81.4 in June from 74.3 in May, for the best reading since January 2008.

Redesigning 401(k) Plans

But for those who are ready to re-enter the markets, the traditional style box approach to defined-benefit (DB) retirement plans doesn’t work anymore in this high-risk, low-yield global environment, said Robert Capone, executive vice president with BNY Mellon Retirement.

He admitted that target date funds as now designed are not the best solution, but Capone said the DC industry and 401(k) plan sponsors are looking to start over again with more flexible investment policies that provide stability and diversification over a wide range of asset classes.

“The industry is slow to change, but we have to start somewhere,” Capone said.

In a “Retirement Reset” report published this June, Capone pointed to the performance disparity between institutional-quality defined-benefit (DB) pension plans versus DC plans, which is an area of concern as DC plans come to dominate the retirement market.

“DB plans have significantly more exposure to nontraditional, ‘outside-the-style-box’ investment categories,” Capone wrote. “We believe the limitations placed upon DC investors by the traditional style box investment design so prevalent in DC plans puts DC investors at a significant disadvantage to investors in more broadly diversified plans.”

Capone then went on to cite the Callan DC Index, which shows that as of Dec. 31, the average DB plan outperformed the average DC plan by more than 180 basis points since the index’s inception in 2006.

Global Equities and the U.S. Dollar

As head of the multiasset research group, Zhou works on developing new investment strategies for BNY Mellon and improving risk controls. In this current period of volatility, here are the investments that Zhou likes:

  • Global equities, which have attractive valuations versus fixed-income securities. BNY Mellon is currently underweight bonds.
  • Carefully selected developed markets. Japan, Germany over Italy, and the United States over many countries are Zhou’s picks. Her favorite currency is the dollar over the euro.
  • In the bond complex, Zhou likes the U.S. and United Kingdom versus Europe.

Meanwhile, Suzanne Hutchins, a global funds manager with U.K.-based Newton Investment Management, one of 15 firms that provide BNY Mellon with global investment solutions, said that Newton is taking a contrarian tactical stance and buying U.S. Treasuries because of their potential for growth in return.

“Over the last couple of weeks we’ve actually been buying long-term U.S. government bonds,” Hutchins said. “I would agree that there isn’t a safe haven status, but it depends on the price you pay for a security, which is why we’re buying Treasuries right now.”

Read 5 Huge Market Shifts, and How Investors Should Respond: Merrill at AdvisorOne.