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By Kevin McDevitt, CFA | 06-13-2013 03:00 PM

Going for Growth in U.S. Equities

Investors' real-return expectations are too high for foreign stocks and too low for U.S. stocks, especially for small- and mid-cap names, says Richard Bernstein, CEO of Richard Bernstein Advisors.

Kevin McDevitt: Hi. I am Kevin McDevitt for Morningstar. We're here at the Morningstar Conference with Rich Bernstein from Richard Bernstein Advisors.

Rich, thanks for joining us.

Rich Bernstein: Thanks, Kevin.

McDevitt: Rich, you've got a number of very interesting contrarian perspectives on the market. We want to explore a few of those with you.

Bernstein: Sure.

McDevitt: The first one I want to get into is the fact that you are actually long Treasuries, which is very rare these days; most managers tend to be pretty short in terms of duration.

Bernstein: That’s right.

McDevitt: And in your mind that's more of a way of hedging an equity portfolio. Why are long Treasuries so attractive? Also, do you think that the benefits of Treasuries as a hedge are likely to persist over time?

Bernstein: First, let me just say one thing. We're not necessarily always in long Treasuries. We adjust the risk of the portfolio. We move along the curve depending on how much equity exposure we're taking. But that being said, our duration [a measure of interest-rate sensitivity] is longer than our benchmark in all our portfolios. And as you said, it's to kind of balance out that equity risk.

What we found, really now coming up on six to seven years, is the only major asset class that has a negative correlation to virtually every other asset class has been Treasuries. And I don't really have a view on whether rates are going up or rates are going down. I just know that if I am going to try and lower the volatility of a portfolio, I have to have something that’s negatively correlated to all the other asset classes. I have to basically protect against being wrong, and that's what diversification is all about.

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