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By Nadia Papagiannis, CFA | 01-26-2011 12:22 PM

Pay Close Attention to Valuations

Quaker Akros' Brady Lipp thinks it is a great time to be in equities but that investors should focus on buying cheap stocks with hefty dividend yields if they want to come out ahead.

Nadia Papagiannis: Hello, my name is Nadia Papagiannis, Alternative Investment Strategist at Morningstar. Today, I have with me Brady Lipp, Portfolio Manager of the Quaker Akros Absolute Strategies Fund ticker symbol AARFX. Thank you for being here with us today Brady.

Brady Lipp: It's a real pleasure, Nadia. Thank you for having me.

Papagiannis: Brady, the stock markets have enjoyed a real good run over the last couple of months especially in December and January. Is this a sign to investors that a lot of the worries are over and they should pile back into equities again?

Lipp: Well, I think that its reason to be cautious actually, the incredible run that we've had. But having said that I think the market conditions are still such that there are plenty of good opportunities in the equity markets. It's a time that I think investors can be involved and still feel comfortable, but it's certainly not without risks. And if you are asking me whether or not investors should throw caution to the wind, I am saying definitely not.

Papagiannis: What are some signs then that we might need to take some caution?

Lipp: Well, one of the things that we've kind of taken a look at is you know from an overall investment process perspective. We spend a lot of time kind of developing a risk assessment of the macro environment and certainly the economic news has been favorable over the course of the last several quarters, and it is probably going to continue to remain favorable going forward.

On the other hand, there is significant fiscal concerns that are out in the marketplace right now.The problems for example, that some of the European governments have been well documented and have been talked about quite a bit. There has been a lot of discussions about what's going on from fiscal perspective at the Federal government level here in the U.S. We are bumping up against our $14.3 trillion debt ceiling that's going to have to be dealt with some time here in the first half of the year.

Your state, the State of Illinois, my state, the State of New York are for all practical purposes broke. And you've got a number of states and municipalities are going to have fiscal issues, they're going have to be dealt with. So, for those reasons I think that you need to concerned and…

Papagiannis: But we knew all of this last year, so what's different about now?

Lipp: I think, the thing that's little bit different is stocks are more expensive today than they were a year ago. I think expectations today are a little bit higher than they were a year ago. If you take a look at the sentiment indicators for example, which is something that we do pay some close attention to, you are starting to see many of these types of indicators that are reaching levels that we've seen historically at market tops.

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