Buy Side Sees Unintended Consequences

Terry Flanagan

The Federal Reserve may be led astray by new initiatives to stimulate the economy, said portfolio manager.

Some market participants and economists alike are still shaking their heads at the alleged failure of the recent Federal Reserve policies; mainly, quantitative easing rounds one and two.

Operation Twist, the Fed’s recent initiative to artificially lower interest rates in the hopes of stimulating borrowing, may look better in the eyes of some asset managers.

“(Operation Twist) is better because it’s not new debt; it doesn’t increase the Fed’s balance sheet,” said Scott Armiger, portfolio manager at Christiana Trust, a subsidiary WSFS Bank in Delaware. The group has 5.6 billion under administration.

Although Armiger is much more positive about Operation Twist—unlike quantitative easing which “sent interest rates up, and spiked commodity prices”—he does not feel the initiative will stimulate the economy in the long run.

“Interest rates are not the problem, it’s getting approved for a loan,” Armiger told Markets Media—noting the tough lending market, an unintended consequence of the 2008 credit crisis that resulted from sub-prime lending.

“Back then, people could buy homes with no money down, and no documentation,” he commented. History, for Armiger, is the reason behind the stiff lending environment, which may be stunting the growth of the U.S. recovery.

Despite an increasingly volatile and growing bear market, there are pockets of investment hope. For Armiger, some financial companies have bright futures, despite bearish sentiment about the sector.

“We like Wells Fargo. They started out as a Mid West bank but then they bought Wachovia and became nationwide. They don’t pay interest on one fourth of their deposits, so it’s low cost,” he said. “They’re well known for their management style.”

Armiger’s team assembles their large-cap U.S. equity portfolio from a fundamental bottom-up approach based on company data, but starts off by a top-down sector approach. Critics of the traditional buy and hold method stem from recent fearful investor sentiment, and convincing investors to stay with their holdings for the long haul may be difficult. Investor unease is not a concern for Armiger.

“We have a twelve year track record, and our clients are more concerned about wealth preservation—they’re made their money. The current volatile state of play is most relevant “if you’re new,’” he said.

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