Wolfgang Klein offers his outlook during this bull run, explains how other advisors can take a discretionary approach
Major market indexes are busy breaking records. The S&P 500 and the Nasdaq-100 both hit record highs at the end of last week. The Dow Jones Industrial Average broke records the week before. While markets have pulled back slightly from their highs broadly-speaking, equity markets have continued their bull run, with US equities leading the pack. This is a moment when investors start to get excited and maybe a bit of greed seeps into their decisions. It’s also a moment when experienced investors get a little wary, cognizant of where things have gone in the past and looking for signs of a possible downturn ahead.
Wolfgang Klein is aware of a few risks on the market right now, but he doesn’t think there’s enough to be all that worried. The senior PM and senior wealth advisor at Canaccord Genuity Wealth Management outlined how he’s approaching the market, where he’s finding opportunities, and how he’s communicating with clients. Despite the length of this bull market — now over 500 days — he sees underlying fundamentals that can back up some of the current valuations.
“Some say the hardest part about a bull market is staying long,” Klein says. “The market had an amazing move, it’s getting stretched at these levels, it’s certainly not cheap…This bull market has been going on for 525 days, which is longer than the average. You’d have to think the market is going to pull back at some point, but earnings have improved. Stronger than expected earnings have made the market a little less expensive and multiples have contracted, the P/E ratio of the market has gone up.”
Klein is weighing a wide array of factors in the decisions he makes for his clients’ portfolios. Those include seasonality, the old ‘sell in May and go away’ trope, which he thinks may not hold as true this year as a US election tends to be connected to strong performance during the summer months. He is wary of the August/September/October window as that tends to be the weakest point in the year.
Despite the noise around high valuations, Klein does think that the performance we’ve seen from large-cap tech continues to be justified. Google and Apple both appear to have turned a corner, while Amazon and other tech winners have held in well. Other sectors have shown some surprising leadership qualities, including utilities and consumer staples.
Klein is remaining flexible in this environment, slightly underweight bonds and holding a roughly 15 per cent cash allocation to respond to opportunities as they arise. The greatest risk he sees, at the moment, is that interest rates don’t come down in time before too much damage is done to either the US or Canadian economy.
While he advocates for flexibility in this environment, Klein is not completely opposed to including some index-tracking allocations in client portfolios. The S&P 500, for example is “working like a charm” in Klein’s words. Klein says he is not a fan of ETFs, but rather prefers to buy the stocks leading an index like the S&P 500. He uses his own quant model called the S&P 25, effectively 25 selected stocks on the S&P 500 index, which he says is up over 18 per cent this year, to the S&P 500’s roughly 12 per cent gains.
If other advisors want to function more as a discretionary portfolio manager to capture opportunities in this environment Klein says it takes willpower and diligence. Advisors need to be willing to accept the responsibilities of money management and especially take responsibility for losing trades. People don’t like to admit they’re wrong, he says, which makes advisors less willing to take on these responsibilities. Advisors also need to be monitoring their positions and their trades every day, which demands a level of discipline and dedication.
Discretionary management also requires a process. Advisors can’t just start trading without the right infrastructure and organization in place. Klein emphasizes that discretionary advisors need the right firm, the right software, the right research methods, and the right strategies. Those strategies need to be repeatable and adjustable to the risk tolerances and returns goals of your clients.
Communication is key to that process. Klein says that while in the midst of a bull run like we’re in now he doesn’t hear too much from his clients. Nevertheless, he maintains a regular stream of communications to ensure his clients know exactly where they’re at even when markets start to capitulate.
“You need a process for communication strategy, my clients ate always being communicated to and therefore my phone never rings,” Klein says. “In times like these you don’t get calls. Clients call us when the market is puking and in panic mode. That’s when you get calls from clients. Right now they’re making money and they send you more money. This is normal, but so are bear markets which is something that clients don’t always understand. Make sure you communicate with clients, do it ongoing, and ramp it up when things are tough.”
