Jason Stipp: It seems like there is a lot of negativity in your thesis. Is the emerging market region of the world potentially a silver lining for us? A lot of folks have been looking to emerging markets recently for the prospects of perhaps greater growth than they might get in developed markets. My question for you and my concern is that to what extent is trouble in the developed markets trouble for the emerging markets, which depend on us for their exports?
Komal S. Sri-Kumar: I think the trouble in the United States, Europe, and generally in the developed markets translate very quickly to emerging markets. I don't believe that the emerging markets can decouple from the industrialized nations, and I took this position several months ago. I have been saying, for example, that the Shanghai Stock Exchange index cannot last, and we are down quite sharply. I believe that the Indian Stock Exchange is due for a correction as well. Both these economies are going to continue to tighten monetary and fiscal policy; they have to, to prevent the speculative bubble. And for all of those reasons I believe that emerging markets are not going to do well. And once again we put our money where our belief is, and what we have done is in some of our funds we have taken short positions in emerging market equities and they have in turn helped us very well in terms of performance.
Stipp: It sounds like a lot of the opportunities you had mentioned gold, emerging markets, are on the short side. You are bearish on those areas, at least in the shorter term. Are you finding any opportunity out there on the long side? And a second question for you is, how are you positioning your portfolios for some of the other concerns and risks out there? How are you protecting on the downside?
Sri-Kumar: This is a tread-water market as far as we are concerned. Meaning that you want to stay alive, you want to keep your head above water, and you want to do whatever you can for the next six months, nine months to earn your keep, so to say. And from that viewpoint, what we see is that we are looking at areas on the ETFs, which can give us some benefit in terms of being aggressive on that side. For instance, a Double Short Euro has been very positive for us and that is again you would think an aggressive position which we have taken and it's benefiting us.
On the other hand, while it comes to the typical, traditional allocation between equities and fixed income, we choose to be very defensive in terms of fixed income, in terms of shorter maturities, shorter duration on the equity side looking to see that we don't overweight the consumer very much, give importance to health care, and those are some of the areas that we like. And, Adam, I don't know if you would like to add something to that.
Adam T. Coppersmith: We are very defensive in our allocations right now, especially with our more aggressive funds. We are still concerned about the growth overseas, especially in Europe. We do have an underweight allocation to the EAFE, especially relative to our benchmark and most of our peers.
Right now we see opportunity in these short ETFs. We don't have too many long ETFs right now, but as Sri mentioned, we are short the euro. We still think that there is going to be further weakness with the euro and in Europe, and we feel that we can maybe capitalize in that area.
We are concerned about the growth in emerging markets and the growth overall outside the U.S., which has allowed us to establish a short position in emerging market. We also have somewhat a defensive allocation to the Chinese yuan. We might expect some kind of appreciation with that currency in the near-term, and maybe we can try to capture that through an ETF as well.
But right now we don't see a lot of opportunities in the long. Most of the opportunities we see are on the short side. The trend right now seems to be down, and we're trying to capitalize on that as much as much possible.
Sri-Kumar: And let me add to that, Jason, because I know you had a question about the medium term following that. So in other words, I am working with an S&P price target of 900 and a Dow Jones Industrial Average price target of 9,000. While we are headed towards that, we are still some 1,000 points away from the Dow Jones target and about 180 points away from the S&P target.
So what I would say is once that is reached, and it looks as if the Obama administration is sufficiently frightened to worry about the economy rather than health care or environment and other areas which are diverting this administration's attention, we will become very bullish on U.S. equities, and I would say U.S. equities are likely to outperform foreign equities.
At that point in time, the emerging market equities are going to outperform even the United States, and China and India and Brazil are going to look very good. And when is that going to happen? Pick a date. I would say March of 2011. We are about nine months away from it, I think. So until that happens, the best thing you can do is to tread water, not lose money, and essentially when we see the market correcting – we are down 220 points on the Dow Jones already today – these are the kinds of markets in which you want to be very careful in terms of your exposure.
Jason Stipp: Thank you very much. Sri-Kumar and Adam Coppersmith, thanks so much for joining me today and for your insights on the market and also your insights on portfolio positioning. I appreciate your time.
Sri-Kumar: Thank you, Jason.
Coppersmith: Thank you.
Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.