MAKING THE CASE FOR BONDS / BARRON´S MAGAZINE

Advisor Profiles

A Top Advisor’s Case for Bonds

Randy Garcia, Barron’s No. 1 advisor in Nevada for the past two years, recommends a hefty fixed-income allocation. Here’s why.

By Michael Vallo           

Aug. 1, 2015 1:47 a.m. ET

 

At a time when many investment pros are skittish about bonds, Randy Garcia stands out. The Las Vegas–based financial advisor is allocating nearly half of his average client’s portfolio to bonds and other fixed-income investments. This isn’t some high-rolling wager. To the contrary, Garcia thinks well-chosen bonds remain one of the most sensible ways to fund a retirement—the goal of most of his clients.

Many advisors, concerned by low yields and the risk that rising rates will hurt bonds’ value, have been moving clients into “alternative investments,” such as hedge funds and private equity. Top wealth managers have scaled back bond allocations to less than 30% of portfolios, while boosting alternatives to nearly 20%, a Barron’s study found.

 

BAD ALTERNATIVE Hedge funds are “a far better deal” for managers than for investors, Garcia says. Photo: Jacob Kepler for Barron's

           

 

But to Garcia, alternatives are no alternative at all. Most fail to meet his basic requirements for investments: no leverage, high transparency, and clarity on downside risk. He’s particularly wary of hedge funds. “It’s a far better deal for the hedge fund manager, who’s charging a 2% flat fee, plus a 20% performance fee, than for the client,” he says. “It leaves too little profit potential for the investor.”

THE DESIRE TO MAKE CLIENT NEEDS his first priority is at the heart of the Las Vegas native’s firm, the Investment Counsel. While he never planned to start his own business, he found that it was the easiest way to align clients’ interests with his own at a time—unlike today—when even top brokers operated on a commission structure.

Earlier, Garcia spent 10 years at Paine Webber, where he built the largest affluent-client book in Nevada. When he launched his own shop, in 1987, he persuaded all but two clients to move with him. Since then, his client base has grown tenfold, to 225 families. Garcia has been No. 1 in Nevada in Barron’s Top 1,200 Financial Advisors ranking for the past two years.

His bond-heavy strategy is a reflection of his client base, which has changed dramatically over his 37-year career. At one point, businesses, particularly those in the construction industry, made up a large portion of his book. Today, many of their owners have cashed out and retired, meaning most of his clients now are affluent families. For many of them, avoiding risk is paramount.

                                  

 

Despite being well above average, Garcia’s fixed-income allocation is actually smaller than he usually recommends. With the persistent uncertainty over interest rates, he has pared the bond portion to 50% from 60%.

He likes the JPMorgan Core Bond Select fund (ticker: WOBDX) because it tilts toward the most liquid federal-government and mortgage-backed securities. Garcia says that mortgage securities offer flexibility in a rising-rate environment because they make regular payments of principal, as well as interest, and those funds can be reinvested at higher rates.

“If interest rates go, up, I have cash available because of the principal payback to reinvest,” he adds. “But if interest rates go down as a result of the world getting uglier, I’m holding Treasuries and Treasury-like securities that are likely to rally the most.” In total, higher-quality mortgages constitute about half of his fixed-income holdings, while Treasuries make up 12%.

Garcia recently added a 7% allocation to bank-loan funds, which have adjustable rates that will climb if market rates do. Bank loans are below investment-grade, but Garcia buys only those rated BB- and B-, the highest quality available.

ON THE EQUITY SIDE, he greatly favors domestic stocks, allocating less than a tenth of the portfolio to foreign shares. He has very little emerging-market exposure. “The risk and the uncertainty is too high with respect to China, and China is such a large piece or portion of the emerging-market index,” he observes. For international exposure, he likes the Lazard International Strategic Equity fund (LISIX).

In the U.S. market, he prefers growth to value, particularly large-cap stocks. “Small-growth and mid-growth valuations are trading at far higher levels—extreme levels actually,” he says.

In general, he prefers best-ideas funds, typically smaller portfolios of managers’ favorite stocks.

Specifically, he likes the Sequoia (SEQUX) and Vulcan Value Partners funds (VVPLX).

Garcia’s modernistic office sports a conference table based on the wing of a 1930s biplane, and offers a view of the periphery of Red Rock Canyon. Near his desk sits an antique slot machine disguised as a pinball game. With a Wall Street theme, it’s the only nod to chance in one of the few corners of Sin City devoted to avoiding risk.