CHICAGO Oct 21 For angst-addled market
watchers, the U.S. debt ceiling and budget chaos has been like
one of those amusement-park rides in which you ride upside down.
It's harrowing and probably not over yet.
In addition to market and credit risk in the stock and bond
markets, you need to be acutely aware of political risk. That
means finding pockets of profit that are not dependent upon
Here are three strategies:
1. Balance risk in one fund
If you're a fairly moderate to conservative investor, having
a balanced fund as a core holding could replace several funds
that hold just stocks or bonds. While you're not entirely
insulated from political risk, it's more of a hedge than being
completely exposed to stocks or bonds. But can you get one
mutual fund to do this for you in a tactical way?
The Oakmark Equity and Income Fund is an actively
managed fund that shifts between stocks, bonds and cash. But the
Oakmark fund is not your typical 60-percent stocks, 40-percent
bond mix. The fund can invest up to 35 percent of its assets in
non-U.S. securities, which it has done with stakes in Nestle
S.A. ADR and Diageo PLC ADR.
Unlike most balanced funds, it has nearly three-quarters of
its assets in stocks, with about a quarter in bonds and cash.
It's done well to date; it's up 18 percent for the year through
Oct. 18, compared with 12 percent for a Morningstar
moderate-risk index. The fund charges 0.78 percent annually for
If you want a more traditional, fixed approach and passive
style, then consider the Vanguard Balanced Index Fund,
which is up about 14 percent for the year through Oct. 18 and
charges 0.24 percent annually.
2. Buy emerging-markets bonds
If owning U.S. Treasuries makes you skittish after the
debt-ceiling stand-off, then diversifying into emerging-markets
bonds might provide a good idea.
Emerging markets bonds, which tend to be much more volatile
than the balanced approach, should be considered "satellite"
holdings for the income portion of your portfolio.
Dividend-payers, in contrast, can be held long-term and be part
of a growth-and-income strategy.
Although bonds from developing countries have been taking it
on the chin this year, they are poised for a rebound if the
Federal Reserve continues its easing policy. A worthy choice is
the iShares JP Morgan US Dollar Emerging Markets Bond ETF
, which charges 0.60 percent for annual management.
The fund, which holds bonds from Brazil, the Russian
Federation, Turkey and other developing countries, is down 5
percent for the year, but up 13 percent over the past five. It
yields nearly 5 percent.
Keep in mind that emerging-markets bonds, which tend to be
much more volatile than the balanced approach described above,
should be considered "satellite" holdings for the income portion
of your portfolio.
3. Hold U.S. dividend-paying stocks
For most investors, a steady dividend is cash in hand that
has little or no connection to Washington's bipolar financing
talks. In addition, dividend-payers can be held long-term and be
part of a growth and income strategy.
According to S&P Dow Jones Indices, a few companies are
poised to raise dividends because of strong profits and cash
flows. This elite group includes AFLAC, Inc., AT&T, Inc.
, Emerson Electric and McCormick & Co..
If you don't have a portfolio that holds stocks like these
through dividend-reinvestment plans, a good vehicle for holding
a variety of them is through the SPDR S&P Dividend ETF,
which charges 0.35 percent annually.
The fund gained about 23 percent for the year though Oct. 18
as dividend payers continue to remain in favor among defensive
investors. That return compares with 22 percent for the S&P 500
index over the same period, and the fund yields 2.5 percent.
Of course, not even experienced Washington pundits can
predict what shape political risk will take in the future as
both parties tussle over the budget and federal debt ceiling.
Only one thing is certain: government disruptions and budget
slashing will deprive the U.S. economy of even more growth,
which could push the nation closer to another recession. If that
happens, you can hedge political risk all you want, but it won't
alleviate the damage to the stock, housing and labor markets.