Best Opportunities in Large-Cap and Dividend-Paying Stocks: BNY Mellon

Investors should bite the bullet and move back into large-cap, dividend-paying and emerging markets stocks, as well as diversify fixed-income holdings, BNY Mellon Wealth Management said.

Investors need to look beyond the latest headlines on the Eurozone debt crisis, fear of economic slowdown in China and the potential for a double-dip recession in the U.S., Leo Grohowski, chief investment officer of BNY Mellon Wealth Management, said in the firm’s recent Investment Insights. “Investors can’t afford to be paralyzed by turbulence and uncertainty in the global markets,” Grohowski said. Instead, they should be prepared to be “nimble to actively uncover investing opportunities rooted in solid fundamentals.”

Where are those opportunities? The strength of U.S. corporations has been largely overlooked, BNY Mellon said. In fact, U.S. equities are on pace to deliver returns of 10% to 15% over the next 12 months, said Jack Malvey, chief global markets strategist and director of BNY Mellon’s Center for Global Investment and Market Intelligence. Fundamentals remain strong, BNY Mellon added: Since 2001, U.S. corporations have been delivering a 15% increase in operating profits year over year.

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Furthermore, Malvey said he believes in “the probability of stronger economic growth after 2012,” noting, “Corporate earnings growth remains positive, and we might also see increases in merger and acquisition activity, equity buybacks or dividends.”

BNY Mellon points to the trillions of dollars in corporations’ cash reserves because of the past four years of “drastic cost-cutting measures.” These companies, “rich in cash,” BNY Mellon said, “are beginning to deploy their capital—meaning that stock dividends, once again, are becoming an increasingly important part of total return. We continue to overweight large-cap stocks due to their strong balance sheets, exposure to relatively healthy emerging markets and high levels of cash.”

Last, while monetary and fiscal policies deployed in the face of the Great Recession will mean deleveraging of debt for many years to come, BNY Mellon praised the U.S. government for its actions in avoiding a depression in 2008 and a double-dip recession in 2011. It now appears likely that the Federal Reserve will take additional action this year to stimulate growth, BNY Mellon said.

The asset management firm is forecasting global economic growth of 3.0% in 2012—and 5% to 6% in emerging markets.

Vanguard to Launch Short-Term Inflation-Protected Securities Index Fund

Vanguard is expected to offer the Vanguard Short-Term Inflation-Protected Securities Index Fund in the fourth quarter.

The fund will seek to track the performance of the Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index, a market-weighted index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years. The benchmark index has an effective duration of 2.53 years and an average maturity of 2.59 years (as of June 30).

The fund will offer four low-cost share classes: Investor Shares, Admiral Shares, Institutional Shares and ETF (exchange-traded fund) Shares.

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“The new Short-Term Inflation Protected Securities Index Fund will provide an additional choice for investors who are seeking protection from inflation,” said Vanguard Chief Investment Officer Gus Sauter. “The fund’s objective will be to generate returns more closely correlated with realized inflation and to offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund.”

The fund’s ETF Shares have an estimated expense ratio of 0.10%. The fund’s Investor Shares, which require a $3,000 minimum initial investment, have an estimated expense ratio of 0.20%; the Admiral Shares, which require a $10,000 minimum initial investment, have an estimated expense ratio of 0.10%; and the Institutional Shares, which require a $5 million minimum initial investment, have an estimated expense ratio of 0.07%. To offset the transaction costs of purchasing TIPS, the fund will assess a 0.25% purchase fee on all shares (excluding ETF shares).

 

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