Hoping to avoid a hangover from a long bull market party, money managers offered New Year's resolutions that reflect a stock market where some of the old rules don't apply.
Unsurprisingly, a few New Year's resolutions were related to investment managers sticking to their investment knitting.
"Never say never," is the New Year's resolution of Mike Baxter, principal and portfolio manager for Hotchkis and Wiley, Los Angeles, which has just less than $6 billion in assets under management.
For 13 years, Mr. Baxter said, Hotchkis and Wiley executives told clients the firm never would own pharmaceutical companies because the drug companies could never meet the firm's investment disciplines.
Hotchkis and Wiley has a criterion that a prospective "earnings yield" (forecasted earnings divided by price) be three percentage points greater than the long bond yield, he said. Drug stocks had a hard time meeting that. Following the dive taken by health care-related stocks in 1993, and relatively low long-bond yields, Hotchkis has "almost a market weighting" in that sector, he said.
Claude Rosenberg, a partner at RCM Capital Management, San Francisco, a growth stock manager with $24 billion in stocks and bonds under management, offered a resolution that reflects the robust growth in the initial public offering market in 1993. He said his resolution is to "work out a way to repackage fallen, existing growth stocks into a form where they can re-emerge as IPOs that the public would fight to buy."
Mr. Rosenberg said excessive demand for, and subsequent market pricing of, IPO shares is one of the "periodic fads" of investment markets, with a few recent IPOs - he declined to name names - experiencing that now.
The situation should correct itself, he said. "There is always a comeuppance," he said, "which is in this case a comedownance."
In a similar nod to the beating growth stocks have taken, J. Parker Hall, president of Lincoln Capital Management, Chicago, with $26.5 million under management, said: "Our New Year's resolution is to resist the temptation to launch a value product - which incidentally would hold the same stocks as our longstanding growth portfolios."
A couple money management resolutions concerned maintaining investment discipline. For example, Maceo Sloan, president, chairman and chief executive of $2.5 billion manager NCM Capital Management Group Inc., Durham, N.C., made a resolution for his firm to continue to follow its "investment philosophy as closely as possible," and not allow "subjective biases" to get in the way.
As an example of how biases can go against a money manager, he said NCM's investment screens at one time indicated the stock Grand Metropolitan PLC was a buy, trading around $22. But one portfolio manager, who had followed the stock, talked NCM's investment committee out of buying it. The stock now trades around $28, he said.
For this year, NCM will "go with our system even more than we usually do," Mr. Sloan said.
Roger Honour, managing director, Montgomery Asset Management, San Francisco, a $2.5 billion manager, said his New Year's resolution is to "not overpay for growth."
That is something he always tries to do managing a growth stock portfolio, he said, but this coming year could see some higher p/e stocks correct themselves if there is a rise in interest rates. He said he's not forecasting that, but some of the so-called "momentum" stocks could fall hard in a rising interest rate scenario.
Richard Burridge, president of The Burridge Group, Chicago, said his investment resolution is to only own stocks that show earnings increases, but that have p/es less than the anticipated growth rates. Again, that is his firm's normal course of action, but a potential pitfall in the new year would be negative earnings surprises, given the market's current relatively high p/e ratio, in the 16 to 17 range. In contrast, the market p/e in 1984 was 9.8, he said.
He's not predicting the market p/e will go down, but he does think it will not rise. "Earnings are absolutely going to be the key" to how the market moves, he added.