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The Golden Touch

Janet Briaud sticks with her investing ideas through thick or thin, and she's usually right.

Jerry Kerns, 02/28/2008

This article originally appeared in the winter 2008 issue of Morningstar Advisor magazine. Subscribe today. We also value your comments. E-mail us with your viewpoints, ideas, and other feedback.

Janet Briaud knows firsthand about what value managers call the "redemption period," when being on the wrong side of the growth-stock rally meant restless nights and fleeing clients.

It was early 1999, and the financial planner--worried about sky-high P/Es and the Y2K computer bug--trimmed her clients' stock allocation to 25% and put the proceeds toward commodities and TIPs. She put some clients in a fixed account that guaranteed an 8% return. She even bought REITs, which had fallen off a cliff.

For a year, it looked as if Briaud had made a decision that ends a lot of careers. The Nasdaq returned 86% that calendar year and the S&P 500 rose 21%. She didn't lose a ton of clients (eight left her practice of 200), but each departure was a "stab in the stomach," she says. Still, she persevered, because intellectually she knew she was making the right moves. But it took a dream to lift the emotional burden of going against the tide.

"I dreamt that we had lost our house, and my two children and my husband and I were leaving, hand in hand," she says. "And I felt okay. The dream was very powerful for me because I realized that I was able to finally say: 'I can lose it all--because I'm doing what I'm doing for the right reasons.' "

A year later, with stock markets tanking, Briaud's moves looked brilliant--which wasn't lost on her clients. "I remember," she says "clients coming back to me saying, 'We wondered what you were smoking. But you had always done a good job for us before, so we just went along with you.' "

Clients Who Let Her Do Her Job
This type of go-along response from clients is typical for Briaud. She frets more about their money than they do. She started Briaud Financial Planning in Bryan, Texas, in the 1980s after moving from Canada (her accent is still more Canadian than Texan). Briaud and a staff of 10 serve 220 clients with $450 million in assets under management. Most of her clients are professors at nearby Texas A&M. (The rest are doctors and business owners.) Her professor clients tend to work in scientific fields, and they value their intellectual capital more than their financial capital, but they have no shortage of the latter. The typical client comes to Briaud in his 50s with $1 million to $2 million socked away in generous 403(b) and 457 plans.

With clients so close to retirement, protecting capital is Briaud's number-one investing priority. But she says she wants to be "conservative with impactful results," meaning that she likes asset classes that have the downside already beaten out of them but have the potential to rebound. For this to happen, she's got to get in early, when the crowd is running the other way. She stays ahead of the masses by hitting the books and analyzing market data that go back a century. She's a passionate researcher and believes history is a great teacher of the present. She's fond of saying that there is no free lunch in the markets.

From her research, she wants to be able to identify major turning points in the markets and be in position to take advantage of them before everyone else does. To do this, she creates stories (Y2K and a jittery, overvalued market don't mix)-out of which themes emerge (we're in for a long bear market). "I'm interested in what can go wrong and how can I protect my clients from that," she says. "Or what could go right, and how do I make money from that."

A Turn to Gold
One area that's going right is commodities. She says we're in the midst of long-term bull market for commodities, a thesis she began developing earlier this decade after reading Marc Faber's book Tomorrow's Gold, which helped convince her that an emerging middle class in developing nations would fuel the demand for commodities. One beneficiary would be gold, she figured, and in 2003 she moved 10% of her clients' money into the precious metal, mostly through Fidelity Select Gold Fund FSAGX. (Her clients in 403(b)s are restricted to Fidelity and TIAA-CREF funds.) For clients not restricted by a 403(b), she uses gold bullion, Vanguard Precious Metals and Mining VGPMX, and USAA Precious Metals and Minerals USAGX.

To some, Briaud might as well had been advising clients to build bunkers and stock up on canned goods. "Everybody told us how stupid we were," Briaud says. "It got to be so embarrassing that I stopped telling people we did it."

Gold has since more than doubled in price, and as prices rise and fall, she rebalances the portfolios to maintain that 10% stake. "To this day," she says, "if you mention gold to my colleagues, they would think you are crazy."

Oil and gas are other commodities Briaud uses, and living in Texas, she's had an intimate knowledge of them for a long time. She uses Fidelity Select Energy Service FSESX and Select Natural Gas FSNGX for her 403(b) clients but would prefer holding oil and gas directly. So for clients who qualify, she goes to the source, buying into oil and gas master partnerships and interests in natural gas royalties. They're less aggressive, she says, and negatively correlated with the market.

More recently, she also has taken an interest in Canadian energy trusts, such as EnerPlus Resources Fund ERF and Penn West Energy Trust PWE. These trusts are difficult to value because of their complicated structures. For that, she uses Morningstar's Fair Value Estimate and Consider Buying/Selling prices.

Commodities also position the portfolios to benefit from any increases in inflation. All told she has about 20% of clients' assets in commodities. She also has 10% stakes in private real estate, including TIAA CREF's real estate fund, and TIPs for the same inflation purpose.

Deflation Danger
Her biggest concern, however, is deflation. The main reason, Briaud says, is debt. Income for most Americans has stagnated, but debt is up--which means an increase in foreclosures and late credit card payments, she says. Also, about 80% of baby boomers are not prepared for retirement, she says, and the economy will slow if they begin to save and reduce spending. PAGEBREAK

"There's a balance-sheet recession by individuals," Briaud says. "I studied what happened in Japan [earlier this decade], and I'm convinced that it can happen here. So we want to make sure that we have assets that would protect us in that kind of environment."

Those assets are cash and government bonds, which make up about 35% of her portfolios. She's also advising clients to pay off their debt, including their home mortgages. "Jeremy Grantham's current estimate of real returns over the next seven years is negative 2%," she says. "If he's right, and your house is paid for, you've made 5% or 6% return risk-free."

Briaud also still thinks U.S. stocks are overvalued, so she has kept clients' equity stakes at 25% of assets, mostly in value and international value mutual funds.

An Economic Winter
If 1999 taught her anything, it's that advisors must adapt to the turning points and cycles in the markets. She points to an analogy by economist Woody Brock.

"It is very easy for us as advisors to do the traditional 60/40 allocation and close our eyes and hope that it's going to be okay," she says. "It's much harder to say, 'We are now in a winter economic season, and in a different season, I'm going to plant different crops."

Jerry Kerns is executive editor of Morningstar Advisor magazine.

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