July22,2019 BARRON’S 5
The Case for Stocks
E
VEN AFTER A ROARING FIRST HALF OF 2019, STOCKS
still look like the best asset class around.
The S&P 500 has returned 20% this year, after
declining 1% in the past week. The index finished
at 2976, below the record set last Monday of 3014.
“The ideal environment for stocks is low economic
growth, low inflation, and low interest rates, and we have all
three now,” says Charles Lieberman, chief investment offi-
cer at Advisors Capital Management in Ridge-
wood, N.J.
The S&P 500 isn’t cheap at 18 times pro-
jected earnings and a 1.9% dividend yield, but
the 10-year economic expansion shows few
signs of slackening and bonds offer little com-
petition for stocks, with the 10-year Treasury
note yielding 2.05%.
Lieberman and others with a value-ori-
ented bent see a lot to like in banking and
other sectors that have lagged behind during
the long outperformance of growth stocks.
Major banks now average 2019 price/earnings ratios of
10—a near-record low relative to the S&P 500—and their
dividend yields average close to 3%. All the leading banks
reported second-quarter results recently. The overall results
were good, with industry leader JPMorgan Chase (ticker:
JPM) reporting a 13% increase in earnings per share ex-
cluding a one-time tax benefit.
T
HE CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT
System, or Calpers, recently reported preliminary
investment results of 6.7% for its fiscal year ended
in June. That’s a good read on what major college
endowments, which also have a June fiscal year, will report
in the coming months.
Many big public pension funds like Calpers and endow-
ments, which have big investments in alternative assets such
as private equity and hedge funds, failed to beat the S&P
500 or even a 75%/25% mix of stocks and bonds the decade
that ended in June 2018. That trend may have continued in
the latest year. The S&P 500 returned more than 10% and
U.S. bonds, a hated asset class among the endowment set,
8%. The Yale endowment, led by the influential David Sw-
ensen, has just 3% of its portfolio in U.S. stocks and as a re-
sult has failed to participate fully in the huge market gains
of the past 10 years.
Private equity has delivered for the pension funds and
endowments, but that game is getting more difficult.
The industry leader, the Blackstone Group (BX), is en-
joying enormous inflows as assets under management rose
24%, to $545 billion, in the second quarter from the quarter
a year earlier. But sustaining high returns is tougher.
Blackstone’s marquee corporate private equity business
returned 5.3% in the first half of the year, way behind the
S&P’s total return. Blackstone’s $34 billion portfolio of pri-
vate and public companies was hurt by some
energy investments as well as a 13% drop in
the share price of Gates Industrial (GTES),
a public auto-parts supplier in which Black-
stone owns an controlling stake.
Jonathan Gray, Blackstone’s president,
played down the performance on the com-
pany’s earnings conference call last week, call-
ing it “a little more of a blip.” Private-equity
funds often lag behind the S&P 500 in rising
markets, but Blackstone’s results indicate that
a challenging environment for private equity lies ahead.
T
HERE IS FRUSTRATION BUILDING AMONG SOME NOR-
mally patient Berkshire Hathaway investors as
CEO Warren Buffett sits on more than $100 bil-
lion in cash in a fruitless hunt for a major acquisi-
tion, while buying back only a modest amount of stock.
Berkshire’s class A shares (BRK.A), at $309,000, are up
1% this year. That’s the worst showing for Berkshire in a
decade relative to the S&P 500. The stock has underper-
formed the S&P in the past five years and matched it over
the past 10 and 15 years—a disappointment given Buffett’s
reputation and Berkshire’s many advantages.
David Rolfe, the chief investment officer at Wedgewood
Partners in St. Louis, trimmed his large Berkshire holding
this year. He explained in a report to clients that the drag
of carrying so much cash ($114 billion at the end of the first
quarter) “has become a stultifying impediment for the com-
pany to achieve our hurdle rate of 10% growth.” With Buf-
fett turning 89 in August, the prospect of a Buffett-less
Berkshire is also unsettling investors.
Buffett got expanded authority to repurchase stock last
summer, but so far the results have been underwhelming.
Berkshire bought back $1.6 billion of stock in the first
quarter after repurchasing $1.4 billion in the second half of
last year. Barclays analyst Jay Gelb sees $6 billion of buy-
backs this year, just 1% of the company’s market value of
Withtheeconomy
stillgoingstrong,
bondsofferlittle
competition
tostocks.
Up & Down Wall Street
By Andrew Bary