Why This Top Advisor Is Bullish on Muni Bonds, Value Stocks, and Alts

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Hello and welcome to Barron's The Way Forward. I'm Greg Bartlett, and my guest today is Holly Neumann Croft, managing director at Neuberger Berman. Today we're going to talk about the markets, inflation, and what might be next. Welcome to the program, Holly.

Thanks, Greg.

So we just recently got some news from the Fed that the market loved, and this is coming a short time after some inflation numbers that the market also was pleased with. Tell me where we are today, what's going on, what you think might be coming next.

Yeah, I think anytime we're seeing good news that's financial-related, the market is acting very positively, maybe disproportionately positively. But I don't think that we are out of the woods quite yet. As you said, the October inflation print was a little bit lower than the market had expected. So the market had a huge rally that day. Powell has indicated that the Fed may slow down the pace of the rate hikes, maybe as soon as December. But we still have to remember that inflation, while it was lower than expected, is still 7.7%, which is a super high number. And the economy has not shown as much slowdown as we need to see for the Fed to totally take their foot off the gas pedal. So While that's coming, and I believe that's coming, and we at Neuberger Berman believe that that is coming, we do not believe it's here yet. So we still think there's some volatility and choppy markets ahead.

Yeah, it's interesting. I mean, the market reaction has really been looking for reasons to be bullish, basically. And even when the Fed stops hiking rates, I mean, it's not even, you know, cutting, right? So you have a lot of this enthusiasm just looking for any signal, and it's understandable that they're chomping at the bit a little to be bullish.

A little bit. And what's important to remember is there are some positives in this market. And while we expect the choppiness to continue, the good thing about the rate hikes is that you can park money in a short-duration muni portfolio that on an after-tax basis is yielding about 6%. That's close to long-term equity return numbers. So you finally have a place that we haven't had since the financial crisis in '08-'09 to safely invest your money and actually earn something on it while we wait for all of these Fed efforts to slow the economy to work their way through and the volatility to subside.

What's the psychology of the market right now? I mean, the VIX is not too elevated. You have still broad fear, but people aren't super scared 'cause you're seeing— where do you think things stand?

I think the market is cautiously optimistic and certainly looking forward to putting 2022 behind us. It has been a painful market with really nowhere to hide. Equities are down significantly. Fixed income is down double digits. This is, this is a market where you have just seen pain all around for your clients and for clients as investors. So I think the market is cautiously optimistic about what next year will bring. And I do think we'll start to see things turn around in 2023, but it may not be until the second half of next year.

Okay. And on a relative basis, where do you, what looks attractive to you? What in terms of assets and if stocks, you know, where in the stock market do you see particular value, et cetera?

Well, so today, like I mentioned, we are holding a lot of money in short-duration muni bonds for our taxable clients because we think that's a very safe and attractive investment today. And like I said, we certainly expect the volatility to continue, and that should remove some of the, the risk from portfolios. On an overall asset allocation basis, we are overweight alternatives. We think that that is an asset class, specifically private equity and private debt, where you're going to find opportunities for outsized returns. If you think about it, the 10-year annualized returns of the market, even through the third quarter of this year, was about 12.5%, and that's 50% higher than long-term returns of the market. We don't expect the next decade to offer us those types of annualized returns. So we're looking at alternatives to, to provide us with outside asset classes. And then in And then in the equity space, we are, we have made a shift in all of our portfolios towards value, not away from growth because that would be a very onerous tax bill, but more overweight value when we can. And we like high-quality companies. So that, that's where we've been focused for about the last 18 months.

Yeah. What's pretty amazing is that at the As of right now, the, um, the Dow is down something like 5% year to date. And the NASDAQ is still down over 25%. S&P is kind of in the middle and, and the Russell 2000 down about 16%.

Yeah. But don't you think that that all makes sense? I mean, look at all these growth tech-focused companies that had— and I know I'm interrupting you, sorry— that had huge, huge, um, growth and returns over the last decade. So they're being disproportionately punished today. But I bet if you look on a long-term annualized basis, they're still way ahead of the game.

Yeah, no, I totally think it follows. Yeah, I was not suggesting that it was irrational. It was just more interesting just to observe that the market is down, right? It's not this monolithic thing though, that you do have a parting of the ways. And it is a rational thing given that they have higher yields, lower valuations with the Dow, more the value orientation. And then so many tech stocks, I mean, even quality companies have been knocked 50 to 80% down. A lot of those long duration, it's just a repricing. I mean, they had ridiculous valuations and when money was flowing easily, it just, the money flowed in willy-nilly and now it's just been like, boom, total.

Yeah. And I think markets like these also favor active management over passive management because in any sector or subsector, even if they're growthy, you know, you can find a high-quality company trading at a good valuation. Probably not in an overall subsector index type of strategy.

What do you think the market is assuming right now? What's the kind of the base case that's reflected in current prices and where, if anywhere, do you think that they may be misguided or that the market is wrong in its assumptions?

It's hard to argue that the market might be wrong because we, it dictates every, everything we do all day, every day. And what I have said to my clients all year this year is if the market was up, I would be much more nervous. In a market sort of like what we've experienced the last 10 or 12 years that has basically gone up without a lot of care or concern for fundamental analysis and studying balance sheets and income statements and businesses, really, that makes me more nervous. You know, we are— we have a war between Russia and the Ukraine. We have China's zero-COVID policy, which is causing a whole slew of issues and pressures on the market. We have the Fed raising rates at the fastest pace that they've raised in 40 years. The world is uncertain. And so the market really should be down. This is the worst market in a century for a 60/40 portfolio. So in a way it's a rationalization and like you just said, a revaluation and sort of a new launching pad from which we can start to grow once things settle down. And we don't think we're quite there yet.

Okay. Okay. And the bond market sell-off really is in some ways more significant than what we've had with equities given the magnitude and whatnot.

Yeah, the bond market. I mean, again, I think, I think 2008 and 2009 taught us that bond research is incredibly important and ratings, you know, are one thing, but you really need to dig into every bond that you're going to own in your portfolio and stay short right now in high quality and you're going to be paid handsomely for that. So why take any additional risk? The one area where we do like and the change we are making actually in the fixed income space is traditional high yield. For about the last 12 or 18 months, we have used floating rate bonds and for our high yield allocation to keep pace as rates go up. But we are now seeing, because we think we're near the, the end of the rate hike, we're seeing really attractive yields with very strong companies. And remember, companies often refinanced their debt before COVID so 2019-ish. And then they spent COVID strengthening their balance sheets. And you would've thought that they would've used those strong balance sheets to invest in their businesses, pursue M&A activity, whatever, in 2022. And they haven't been able to do that because the market is so unstable. So now we have these high-yield issuers who are presenting with strong, strong balance sheets. So we don't expect default rates to go up at all. And we're able to invest in really attractive yields.

Okay. And you mentioned that you also like muni bonds and alts. Are there any areas that you're shying away from?

We're still underweight. We're generally underweight equities within an asset allocation. We're definitely underweight international and emerging markets. We want to see some clarity on the war. I think the whole world would like to see some clarity on the war. It would be great if China eased up on their zero-COVID policy. We're a little bit worried about a severe winter and, and what impact that might have on Europe. But again, I think when the time is right, that'll present a really attractive investment opportunity because international and emerging market securities have been so punished this year. So we just gotta wait for the tide to turn a little bit.

Okay. And now I just want a little pivot away from the markets just to talk a little bit more about running a practice, dealing with clients. In a Barron's story, you talked about the importance establishing a connection with the client, and you attributed that in large measure to explain why and how your firm drummed up an awful lot of AUM in, in a relatively short amount of time. And you talked about that your real strength is your ability to establish friendships with people. Tell me about just how that and how and why that's so important.

Look, we're on the high net worth side of the business, so we're dealing with people's money, which I hope is their second most precious asset after their family. Unfortunately, that is not always the case. Sometimes they prioritize money over everything. But, you know, with great wealth comes great responsibility. And our job as an advisor is not only to talk about markets, but it's how the markets and how their financial situation impacts their life broadly. Does it, you know, generational planning, philanthropy, what do they think about their legacy? Their children, how do they protect their children or protect their children from themselves? There's so much more that, that is involved in being a successful wealth advisor than, than straightforward returns in the market. And I think that that is critical to building a successful large business, but also to sustaining it.

And you know full well about how to balance being a parent and a high-pressure job. And I guess for clients who can relate to that, you can speak their language, so to speak.

Yeah, I mean, I just got off a panel talking about work-life balance, and I think it's really important to communicate to your clients that you understand the pressures on their life and share with them the pressure sometimes in yours, that you're always available to them, just not always at the time that they want to speak to you.

Right. I think I read you said, if you contact me between 6 and 8 PM, I'll get back to you soon, but not pronto necessarily.

Exactly. That's dinner and homework time in my house, so I like to be present for my kids.

Excellent. Okay. Well, I think that just about does it. So thank you. Thank you so very much for joining me today.

Terrific. Thanks, Greg.

Oh, thank you. My guest was Holly Newman Croft. For more advisor-specific podcasts, please check out barons.com/podcast. For The Way Forward, I'm Greg Bartolis.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.