Market volatility has money managers seeking to preserve client capital

With the current volatility in both stock and bond markets, most money managers aren't as worried about taking risks in a portfolio as they are about preserving your capital and protecting income from dividend-oriented or growth stocks and bonds.

Still, they are all having a hard time reading what has been an unusual investing climate.

Such is the case with local money manager Bob Costello, who manages $55 million at his own shop, Costello Asset Management in Huntingdon Valley. A La Salle graduate, he started out at W.H. Newbold's Son & Co., then went on to Boenning & Scattergood Inc. before setting up his own advisory firm.

"I try to buy businesses that have recurring revenue and are not as dependent on business cycles. That's why I like Visa Inc.," he said.

Trading under the ticker symbol "V," Visa has a market capitalization of more than $77 billion compared with $18 billion when it went public in 2008. "We are living in a cashless society. While it's not a cheap stock, it's growing. Can they grow to a $200 billion stock? I think so."

And despite the historic low prices in natural gas, he also likes Piedmont Natural Gas Co. Inc. (symbol: PNY) and UGI Corp. (UGI), a diversified energy company in Valley Forge.

In March, UGI said it would develop the Commonwealth Pipeline, a 200-mile, 30-inch pipeline transporting Marcellus Shale gas from northeastern Pennsylvania to major markets in the Mid-Atlantic states. And UGI recently declared a 4 percent increase in its stock dividend, maintaining a 25-year trend of increasing the dividend. "The natural gas industry is dirt cheap," he added.

Finally, Costello also owns the French energy giant Total S.A., a stock he predicts he could hit $60 for its American depositary receipts (TOT), which closed at $42.50 Monday. "Their dividend yield is 7 percent and it is selling at six times earnings," a level cheaper than its peers, he said.

Portfolio managers all over are harking back to other times when the markets were this volatile — and remark that everyone appears to be hiding in the same investment plays (dividend stocks, corporate and municipal bonds, precious metals).

"I've been in finance since 1973 at the Federal Reserve Bank in New York," recalled Ray Stone, cofounder of Stone & McCarthy Research Associates in Princeton, whose firm supplies much of the economic data and analysis to Wall Street. "What is so different? We had a series of bubbles over time. The equity bubble in the late 1990s, then a second bubble for housing that affected more people. Few of us have large stock portfolios, but many of us own homes. We're underwater, and that has made the financial fallout particularly difficult."

He added: "Financial crises are often longer than recessions. We are on the right track out of the recession, however."

U.S. economic growth remains a tepid but steady 2.5 percent annually. Still, the recovery doesn't feel as good because the unemployment rate has reached what seems like a permanently higher level at 8.2 percent as of last Friday's jobs numbers. Inflation shouldn't be a problem, according to Stone. "We still have loads of slack in the economy, and that should contain inflation."

The only time Stone recalls this type of market volatility was a period in the early 1980s "when the Fed was targeting money supply and short-term swings in the bond market were more acute. But today, we have more crosscurrents like the federal deficit in the U.S. And now credit-related news [such as Greece's possible default] has a huge impact."

Nonetheless, the Treasury market in the U.S. remains a haven, as last week's record low yield on 10-year bonds showed. But it can't last forever. The question is, just how long will it last?

Financial advisers specializing in planning for special-needs kids say it's more important than ever to make sure there is a trust set up in the child's name — and that the children not receive money directly.

Planners with Firstrust Financial Resources, a wealth management firm that represents MetLife (symbol: MET) point out that in Pennsylvania, special-needs children can't hold assets in their own name — otherwise their government subsidies could stop. In such cases, it's common that they and their families have to reapply for Medicaid and Social Security once the assets in the child's name run out.

With government subsidies under fire, it is important to make sure your special-needs child doesn't miss out because of financial assets held in their name.

Another common mistake: Parents of special-needs kids leave money to other children and ask them to take care of their brother or sister, but have never discussed the responsibility. If you leave all your money to your non-special needs child, who then gets divorced, half of those assets could go to their ex-spouse.

Planning strategies aren't just for the wealthy. They can be used to protect your family.