SOURCE: Millennium Media Consulting

March 30, 2007 16:49 ET

Investment Professionals Discuss 2007 Stock and Bond Markets and Economic and Regulatory Outlook at Winter 2007 Investment Press Briefing

NEW YORK, NY -- (MARKET WIRE) -- March 30, 2007 -- At the Winter 2007 Investment Press Briefing held last month, investment professionals gave their projections for the stock and bond markets and the economy in 2007, and examined the regulatory issues that the investment management industry faces in the year ahead. The media conference was hosted by Millennium Media Consulting, an Arlington, Va.-based public relations and media consulting firm. A summary of the speaker presentations follows.

Globetrotting for Real Estate Value

"We think there are market inefficiencies outside of the U.S. where disclosure is not as frequent and less transparent," commented Robert Promisel, a principal with Adelante Capital Management LLC, an employee-owned investment firm headquartered in Oakland, Ca. which specializes in real estate securities and portfolios. "Investing in International property stocks provides an enhanced risk profile with low correlation to domestic properties. Moreover, the proliferation of tax-efficient REIT structures in countries including the United Kingdom, Italy, Finland, Germany and parts of Asia is driving investments."

"Domestically, REITs are a good value for real estate investors, and we expect 10% to 14% total returns in 2007 with about a 3-1/2% dividend yield and a 9% earnings growth. This is the fifth consecutive year of earnings increases," Promisel offered. "We've seen a shift as landlords now have pricing power and tenants have fewer choices. Buildings are filling up and rent increases have led to enhanced earnings growth, although for many income producing properties, replacement costs such as for glass, wire, labor have been higher."

How likely is a Recession in Late 2007 or Early 2008?

"We believe the U.S. economy is in a slow, grinding deceleration punctuated by massive liquidity and a recycling of money, extreme investor complacency and creative financing that has created the real estate bubble, unprecedented corporate profits and a continued Baby Boomer spending trend as consumers have shown their willingness to live with higher debt levels," said Hugh Moore, a partner at Greenville, S.C.-based Guerite Partners, Portfolio Manager of the Guerite Absolute Return Fund and proprietor of the Guerite Indicator, a quantitative model of 12 market and economic indicators which signals normal or high risk conditions. "We originally predicted a recession last fall, but we now believe that it may be pushed back to as late as the first half of 2008."

So what can investors do? "We believe prudence calls for a conservative investment stance. The lesson is that losses will return, so avoiding losses is the key," Moore added. "We believe that an absolute return strategy is a strategy for all seasons, whether there's a recession in 2007, 2008 or not at all."

Diversification, Proper Allocation Are Key to Delivering Superior Returns

"Most sectors of the bond market are expensive now versus Treasuries," said Don Shute, CFA, Senior Research Analyst with IMS Capital Management in Portland, Ore. "If we look at the risk free rate of return after a secular decline, it's now down to 4% versus a 2% to 3% rate of inflation. For risk-free rates, much of the tailwind is behind us," he added. "In addition, Baby Boomers edging into retirement are moving from higher returns to less volatile investments."

"Opportunities change a lot, so the way to wring out returns is to not be restricted to categories such as high yield bonds which can fluctuate between being the top sector and the bottom sector," he added. "Diversification and allocation changes can pay along with searching for value from all areas of the capital market."

The IMS Strategic Income Fund invests in all parts of the fixed-income market as well as in common and preferred stocks, convertibles, income trusts, business development companies and REITs. "Recently we've cut down our weighting of REITs, increased dividend stocks and we've gone back into Canadian and international debt and locally denominated bond markets," Shute added.

Biogeneric Drugs Fuel Biotech's Boom

"The biotechnology and biopharmaceutical sectors are the benefactors of several themes including the very real trend of the aging population," said Stephan Patten, CFA, of Montreal-based Sectoral Asset Management, subadviser to the Quaker Biotech Pharma-Healthcare Fund, of which he serves as co-portfolio manager. "One of the fastest growing segments is the age group of 65 and older. The average 65-year-old fills 18 prescriptions per year while the typical 73-year-old is taking 23 medications per year," he noted. "But drug development is a risky endeavor. Of 5,000 drug candidates in lab testing, only one will ultimately make it to the market."

"Ten years ago, about 10% of new drugs were coming from biotechnology companies, while now they are developing 50% of new drugs and overtaking pharmaceutical companies," Patten noted. "By 2012, 25% of sales of drugs will be from the biotechnology industry, yet the biotechnology sector is now trading at 10-year historical lows."

What is the newest hot button issue? "Biogeneric drugs are coming to the fore. These are very different from chemical drugs or generic copies thereof. In some cases companies are finding it difficult if not impossible to create generic copies of biological drugs," Patten explained. "We will likely see some Food and Drug Administration and Congressional guidance on rules for these."

Fending Off the Weakening Dollar

"I believe 2007 will mark the return of volatility into major asset classes. We're heading into an economic slowdown and so inflation, which the Federal Reserve is showing no fear of, will peak and slow down. In addition, if and when credit contracts, it will affect the American consumer whose spending is approximately 2/3 of the U.S. GDP," predicted Axel Merk, Founder of Palo Alto, Ca.-based Merk Investments and portfolio manager of the Merk Hard Currency Fund which invests in a basket of foreign currencies as well as gold.

"We should expect 2-3% or more volatility once in a while. We need that shakeout to get out some of the excesses and to extract some of the liquidity that has been coming from so much leverage. Increased volatility might also be a sign of a larger correction to come," Merk predicted. "The concern is that there will be a spillover onto the American consumer and could be a threat to the leveraged credit derivatives market which won't harm all companies, but those on margin will have to liquidate positions."

"Of great concern is the twin deficit; the combination of the current Federal budget deficit and the current account deficit, which is the difference between what Americans earn from other countries and what is paid out to other countries. This trade deficit shortfall rose to $800 billion and foreigners must keep buying $2 billion worth of US dollar denominated assets each day to keep the US dollar from falling further," he noted. "Because of the weakening dollar, dollar cash is no longer the safer asset class."

Targeting Value Companies

"This is a target-rich environment," said Larry D. Coats, Jr., President and Chief Executive Officer of Durham, N.C.-based Oak Value Capital Management and Co-Manager of Oak Value Fund. "Every day another great business is being punished by the market for some reason," he added. The Oak Value fund invests in good businesses that are generating excess cash flow, with competent, shareholder-oriented management teams that can be obtained at attractive prices that represent a discount to intrinsic value.

"Right now, on average, 40% of revenues from the 24 companies in our portfolio are being generated outside the U.S.," Coats noted. "We recently added Apollo Group, Inc., which had management changes, and we bought eBay and Oracle. Five years ago, Oracle was generating significant revenues from up front license fees, but now 40% of their revenues are from recurring annual subscriptions which offers so much more predictability."

Regulatory Roundup

"With soft dollars, there is an unequal playing field right now," said Janaya Moscony, CFA, president of Philadelphia-based SEC Compliance Consultants. "Hedge funds do not have to comply with the safe harbor provisions of soft dollar rules. This creates favoritism toward them," she noted. "I've seen hedge fund managers that do soft dollars to pay for utilities, office construction and TVs. That's one of the reasons I believe hedge funds should be regulated."

"There is also a disparity over the cross-trading of securities," Moscony noted. "There are three different sets of rules, all of with which managers have to comply. But because compliance is difficult, some managers just prohibit cross-trading within the firm. However, the Securities and Exchange Commission, on inspection, will often ask why cross-trading isn't being done because it can save clients money."

"An old proposal related to point of sale disclosures is still pending a decision by the SEC," Moscony noted. "The Investment Company Institute says that such disclosure will be disadvantageous to mutual funds because brokers will have to hand out disclosures about mutual funds so they will instead choose to promote other products."

For reporters and editors: To obtain more information about any of the mutual funds or companies notes above, or to speak with any of the investment or compliance professionals, please contact Scott Tanner at Millennium Media, Inc. toll-free at 866-755-FUND (3863) or by e-mail at

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