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Seeking shelter, investors find bond trap

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roeder report

David Roeder reports on real estate at 6:22 PM. Every Thursday on News- radio 780 and 105.9 FM WBBM. The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday

Updated: March 5, 2012 7:57AM

Investors have a maddening way of fighting the last war. Or, as Bill Nygren, co-manager of three Oakmark funds, puts it, “Investors have always carefully analyzed the view in the rearview mirror.”

Nygren is probably the most honored fund manager in Chicago, so some importance should be attached to his current mood. He’s positive about the stock market, and about large-cap companies in particular, while being dismayed about people’s approach to it.

Rather than venture deeper into the markets, investors traumatized by the recession are often raising their exposure to bonds. After all, aren’t bonds the classic way to calm nerves?

They’ve always been sold that way, but 10-year Treasuries yield less than 2 percent and AAA-rated corporate bonds pay only half a percentage point more. Bonds have been great performers the last few years, but mathematically they can’t keep up the pace, and tying up your money for multiple years exposes you to inflation.

“We see [stock] investors selling to increase their holdings in bonds and that’s absolutely the wrong way to go,” Nygren said. The latest monthly survey by the American Association of Individual Investors found people are increasing the proportion of assets devoted to bonds. In February, the proportion was 22.6 percent, the highest since September 2010, the association said.

Financial planners still push heavy bond allotments on clients, especially those nearing retirement. A writer last week at that other, less interesting Chicago newspaper dug up three planners who counseled bond exposures of 50 percent to 75 percent for their older or more jittery clients. These supposed sharpies are escorting their customers into trouble.

Meanwhile, as Nygren points out, the price-earnings ratios of most stocks are below historical averages and the balance sheets are low on debt and high on cash. Dividend yields of many good stocks are far higher than bond yields, and companies have the flexibility to increase the payouts.

The last time there was such disparity between dividend yields and bond yields was the 1950s, Nygren said, and that was a great time to put money in stocks.

Nygren is co-manager of the Oakmark Fund (OAKMX), Oakmark Select Fund (OAKLX) and the Oakmark Global Select Fund (OAKWX). The first two of his funds, plus the Oakmark Equity and Income Fund (OAKBX), hit milestones last week. They recorded their highest net asset valuations ever. All of the funds’ shareholders had made money.

It’s a notable achievement, given that a benchmark for these funds, the S&P 500, is about 200 points short of its all-time high, with a current level of 1,369.63. Few fund managers beat the benchmark as consistently as Nygren has. His record has drawn accolades from the fund-rating firms Morningstar and Lipper.

Nygren’s favorite companies include cable operators Time Warner (TWX) and Comcast (CCS) and financial services firms JPMorgan Chase (JPM) and Capital One Financial (COF). Information technology and consumer discretionary companies tend to be his top picks.

One sector to avoid is utilities, whose prices have risen beyond any measure of a good value, Nygren said.

In other words, they’re too bond-like.

GROWTH AND STABILITY: Financial editor Jeff Reeves, writing at, suggested three blue chips that provide sustainable dividends and growth possibilities. They are Intel (INTC), Caterpillar (CAT) and McDonald’s (MCD).

Intel, he said, isn’t just inside computers. It’s getting big in smartphones too. At CAT, the more construction equipment it makes, the more it sells, while MCD has raised its dividend more than fivefold since 2007.

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