Biotech, Utilities Help Withstand Storm

July 15, 2008

Private accounts manager also building reserves with eye on solar and alternative energy stocks once investment climate improves.

Andy Hill considers himself a long-term investor. But in times like these when banks are failing and gas prices are soaring, the portfolio manager at Comerica Asset Management says it's time to be a little more pragmatic.

Even the most optimistic bulls need to focus at least a bit these days on preserving wealth using exchange-traded funds and stocks, Hill says.

"We're building cash right now in anticipation of some buying opportunities we see coming up as soon as market sentiment settles," he said. "We've got a list of areas in the market we're eyeing, waiting for more attractive entry points to put new money into once markets turnaround."

That could take weeks, months or even years, Hill concedes. But instead of picking a market's bottom, Hill has bumped up his clients' cash cushion to around 10% of total assets. It's not a huge reserve considering the amount of market turbulence taking place.

But it's almost double what it was a year ago or so, Hill says. That's just enough, he figures, to have some extra money on-hand when stocks look more attractive. It's also a fairly mild adjustment to his longer-term portfolio plans for clients, Hill notes

"We've made sure our client portfolios are well-diversified. We're prepared to ride out this current market cycle's storm. At the same time, we wouldn't mind nibbling at a few positions as conditions improve in the future," he said.

Hill says he's being cautious by making sure his clients' portfolios are well-insulated against market whipsaws. The Comerica manager's also spending much of his time doing due diligence on new funds and alternative  investments that might prove handy in the future.

Hill's group handles about $15 billion in assets under management for high net-worth and institutional investors. It's putting new money into money markets and other highly liquid accounts for now. At the same time, Comerica's managers say for the most part they aren't bailing out of existing positions.

No Sea Changes

"Trying to time markets and pick a bottom is very difficult," he said. "So we're not making any big changes. This is a good time to build our watch lists and prepare for a change in cycles."

While he does use, as a complement, individual stocks, his team prefers to stick with ETFs in the fixed-income area. "They're much quicker and simpler than buying individual issues," Hill said. "And the smaller the portfolio, the more fixed-income ETFs make sense."

In general, he believes that ETFs "are an easier way to gain broad exposure to entire sectors or asset classes than picking a group of individual stocks. ETFs are just a much more efficient way to diversify our client portfolios."

On his radar are small-cap ETFs. The one he's using now is the iShares S&P SmallCap 600 Index (NYSE: IJR). "I think it's important to know what the underlying index represents," Hill said. "The S&P 600 is easy to track and very transparent. I can click on a number of different databases and software programs and instantly bring up sector breakdowns, price patterns and the index's important characteristics."

Right now, his clients are holding between 5-10% in small-caps. "Once the economy starts to rebound, small-caps tend to be an area of outperformance," Hill said. "So that's an area we're keeping an eye on to put new money into down-the-road."

He's overweighting health care in some of his portfolios. An ETF he likes in that sector is the Biotech HOLDRs (AMEX: BBH). It has gained more than 7% this year, some 22-plus percentage points better than the S&P 500.

"We're expecting more consistency in earnings from some companies in this part of the market. And I anticipate that Medicare reimbursement rates, which are highly political, won't be materially changed this year by the results of this upcoming presidential election," Hill said.

Product Cycles A Factor

Biotechs, in fact, are getting a lot of hype now. "The relative strength of biotech companies lately have been very strong," Hill said. "Their stocks have been performing stronger than the market as a whole. As investors move out of more economically sensitive stocks, biotech is benefitting since their product cycles have very little correlation to the broader market."

Another ETF he's using is iShares S&P Global Utilities (NYSE: JXI). "At this point in the economic cycle, you'd expect financials to be a safer place to invest," Hill said. "But that's obviously not happening. Time will tell, but we think utilities might fill that void for conservative investors."

So far this year, JXI has lost about half as much as the broader stock market. And it's yielding more than the S&P 500-type of index funds, he added.

Hill is keeping an eye on the Claymore/MAC Global Solar Energy (NYSE: TAN). "There were a lot of concerns in the market earlier this year about lowered subsidies," he said. "And more recently, expectations of changing materials prices for solar manufacturers and bans in the U.S. regarding using public lands for solar farms have overly punished individual stocks. So we're considering whether this might be a good time to pick up some TAN for our clients."

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