Managers who participated in last year's Pensions & Investments roundtable may want to trade in their crystal balls.
Only Alan B. Bond, chief investment officer of New York-based Bond, Procope Capital Management (now Bluestone Capital LLC), correctly forecasted the 1998 U.S. stock market return - at least so far - at between 15% to 20%. All of the rest underestimated this year's market gains.
"So I was 20% off,"said Peter Anderson, senior vice president, investment operations, American Express Financial Advisors Inc., Minneapolis. He predicted that the 1998 stock market return would be zero.
Other panelists were Gary L. Bergstrom, president, Acadian Asset Management, Boston; John Y. Kim, president and chief investment officer, Aeltus Investment Management, Hartford, Conn.; and James Weiss, deputy chief investment officer, State Street Research & Management, Boston.
Mr. Bergstrom and Mr. Weiss both expected high single-digit returns for the S&P 500.
"The thing we missed completely is that the market would turn on a dime in October," Mr. Bergstrom said.
"I would just make the observation the year isn't quite over yet," said Mr. Weiss in mid-December, adding that odds are that the year will end better than he had expected, particularly for small-cap stocks.
Mr. Kim was less conservative at last year's roundtable, projecting returns of low double digits. While he is not going to be correct on overall return, he said, he was correct in saying the U.S. would be the market of choice for world investors. The only worry he has is that Wall Street may suffer due to uncertainty over impeachment and Iraq.
All agreed volatility had some effect on their predictions.
This was one area where Mr. Anderson was right. He expected lots of volatility, but thought it would basically yield a net return of zero in 1998. He expects more of the same volatility for 1999, with one significant correction that will test 7000 on the DJIA.
Last year, Mr. Anderson also went out on a limb on hedge funds. He said, "I think it ought to be a very attractive environment over the next 12 to 15 to 18 months for hedge fund operators."
After the Long-Term Capital Management debacle, he still agrees that the environment will be attractive, especially with the volatility in the marketplace. The year was a good one for his firm's hedge fund, but other hedge funds weren't quite as lucky, he said.
"It will be a fund by fund phenomenon," he added.
In late summer, Mr. Weiss wanted off what he called "Mr. Toad's wild ride." He believes that the market has come back and should stay on track and he still believes in large-cap technology stocks.
Mr. Bond, who calls the trading room an investment laboratory, said corrections will take place over six days rather than six months. "It has been an extremely long bull market cycle and I don't think it is over yet." The market will return between 18% and 25%, he said.
The Asian crisis not only scared U.S. investors, it also imported the problem of volatility, Mr. Kim said. He too believes volatility will play a role in the markets in 1999.
A contrarian, Mr. Bergstrom last year said volatility would decrease in "the next six months or year or so." He calls what actually happened in August and September a "volatility storm," which he believes has subsided.
Mr. Bergstrom, Mr. Anderson and Mr. Kim all were bullish on small-cap stocks. As of Dec. 18, the Russell 2000 index had returned 2.58% for the year. They now think that 1999 may be the year for small caps, because the asset class looks even more attractive now, they said.
While it was a "pretty ugly" year for small-cap stocks, Mr. Anderson thinks that they will probably stay cheap for a while.
Mr. Kim believed that small-cap would outperform large-cap in 1998. His weighting in small-caps hurt his portfolio, he said, but he will not deviate from the way his portfolios are positioned, especially since valuations of small-cap stocks are now even more compelling.
Mr. Bergstrom agrees that smaller stocks are better now than ever, particularly in Japan. Last year he predicted that stocks in Japan and Europe would be good opportunities for investors.
Overseas investing was a mixed bag in terms of return. While markets such as Korea and Greece had high double-digit returns, other countries such as Venezuela and Russia posted returns of -61% and -80%, respectively, for the year ended Nov. 30. Mr. Bergstrom seems bullish on emerging markets, since some of them had a strong year until now.
Mr. Kim was pleased his European prediction panned out. "We made out like gangbusters," he said.
He also liked Japan, but was not sure 1998 would be the year, expecting 1999 to be better.
Europe was not a compelling value to Mr. Anderson a year ago, and in his outlook for 1999, he still sees it as "fairly richly valued."
Overall, Mr. Weiss said, managers had the opportunity to be on both sides of the street this year. As for his "wild guess" on Brazil last year - "they are bright people, so we may actually get a positive surprise out of Brazil" - he's sure he must have meant Belgium.
