Source: Barron's Chinese Author: Nicholas Jaskinski Evan Greenberg, CEO of Chubb Ltd, has a highly influential fan - Warren Buffet, CEO of Berkshire Hathaway. Berkshire Hathaway disclosed last month that it held 6% of the shares in Chubb, one of the world's largest insurance companies, by the end of 2023. Berkshire itself is a major participant in the insurance industry, but it is not the only buyer. In the past year, Chubb's stock return, including dividends, was about 40%, surpassing the S&P 500 index's total return of 25%, and making the company's market capitalization reach $110 billion. This increase in market capitalization reflects Chubb's outstanding performance, which is attributed to its prudent underwriting practices and conservative management of its investment portfolio of about $140 billion. The company's earnings per share increased by 48% in 2023 and its book value per share increased by 21%. Greenberg is the son of Maurice "Hank" Greenberg, the former CEO of American International Group (AIG). Greenberg worked at AIG for 25 years, rising through the ranks. He left the insurance company in 2000 and took over Ace Limited in 2004. The company merged with Chubb in 2016, the largest M&A in the property and casualty insurance industry at the time. Today, Chubb is the largest commercial insurance provider in the United States, and the company is also known for its high-end homeowner insurance for the wealthy. However, about half of the company's premiums last year came from outside the United States. Asia has always been a growth area where the company is bullish: Although Asia accounts for 40% of global GDP, the insurance industry accounts for only 26% of the global insurance market share. This gap is expected to narrow over time. Greenberg sits on the board of several nonprofits that focus on international and Asian affairs. Barron's recently interviewed Greenberg about his underwriting philosophy, the challenges of dealing with increasingly frequent climate disasters, and US-China relations. Following are the edited excerpts of the conversation.
Author: Lauren Foster

"Cash is king" dominated in 2023, now it is time to reallocate cash.

With the temptation of a 5% return, over $7 trillion flowed into money market funds and other cash assets, but the outlook for cash assets is becoming dim as Fed rate cuts will erode cash asset yields.

Wall Street eagerly awaits large influx of cash into stocks and fixed income markets. BlackRock's President Rob Kapito said: "Every morning, I wake up drooling over the $7 trillion waiting for action in money market accounts." BlackRock manages over $3.5 trillion of iShares exchange-traded funds (ETFs).

Even if the returns of money market funds do not drop significantly, holding cash long-term will incur significant opportunity costs. Investors who stayed on the sidelines during last year's stock market surge missed out on a 26% return.$S&P 500 Index (.SPX.US)$According to Bloomberg U.S. Aggregate Bond Index, the average return of bonds at 5.5% also exceeded cash.

MDRN Wealth founder John Boyd said: "Last year was a textbook example of why trying to hold cash and time the market is usually a bad move."

Inflation and taxes can erode the return on cash assets. Based on a 3.4% Consumer Price Index (CPI), the overall yield of 5% money market funds is reduced to a 1.6% "real yield". If you hold money market funds in a taxable account, your actual return may be even lower.

Blair duQuesnay, Senior Investment Advisor at Ritholtz Wealth Management, said: "Cash assets are like frogs being boiled in warm water." She added: "Not investing in the market and only holding cash can bring huge opportunity costs, as cash depreciates significantly due to inflation."

Bonds may outperform cash this year.

With interest rates falling this year, bonds appear more attractive. Although bonds have rebounded, Jeffrey Johnson, Head of Fixed Income Products at Vanguard, sees value in the market and emphasizes the importance of not procrastinating. He said: "One of the key points is for investors not to hesitate, in this environment, looking forward, not backward, is really important."

Investors may consider a three-pronged strategy, ranging from low to high risk: short-term bonds, mid/core bonds, and more speculative junk bonds.

The yield of short-term bonds is closely related to the market's expectations of interest rate changes. Including$Vanguard Short-Term Bond ETF (BSV.US)$And.$Vanguard Short-Term Corporate Bond ETF (VCSH.US)$Several Vanguard ETFs track the market at ultra-low cost, with expense ratios of only 0.04% and returns around 4.5%.

Actively managed bond ETFs may generate higher returns. The Pimco Enhanced Short Maturity Active ETF created a yield of 5.4% using securitized debt, futures, and options. Others to consider include those with a yield of 5.4%.$Jpmorgan Ultra-Short Income Etf (JPST.US)$And the BlackRock Ultra Short-Term Bond with a yield of 5.5%.

In a declining interest rate environment, the following ETFs and mutual funds may outperform cash assets.

Due to an inverted yield curve (short-term yields higher than long-term yields), the yield on mid-term bonds may not be as high. However, in a declining rate environment, investors can obtain higher overall returns in longer-term bonds that are more sensitive to interest rates—combining capital gains and income. This is a relatively safe way to invest in the bond market, Du Quenoy said.

$Vanguard Total Bond Market ETF (BND.US)$Covering the entire market, with a fee of only 0.03% and a yield of 4.3%.

Bonds can also play a certain supportive role in a stock market downturn. Thornburg Investment Management's Co-Head of Investments, Jeff Klingelhofer, said that when the Fed raises rates, stocks and bond assets are not both under pressure, but now that the rate hikes have ended, high-quality intermediate-term bonds should once again act as a hedge against stock market declines. He said: "If we really enter a recessionary environment, high-quality fixed income portfolios should be negatively correlated with other asset classes - they should rise."

The Thornburg Strategic Income fund managed by Klingelhofer has a yield of 4.15%, with a strong track record, outperforming similar funds with an annualized return of over 83% over the past 15 years.

Higher-risk junk bonds and alternative credit.

Richard Bernstein Advisors' Fixed Income Director Michael Contopoulos is bullish on AAA-rated Collateralized Loan Obligations (CLO). He said that the cash flow of these securitized products comes from a prioritized allocation of the underlying collateral pool. AAA-rated CLOs have priority access to the pool's returns, thereby obtaining a higher credit rating. He pointed out that these bonds are floating rate, linked to short-term market benchmarks, with recent yields around 7%.

Assets under management of 6 billion USD$Janus Detroit Street Trust Henderson Aaa Clo Etf (JAAA.US)$With a return rate of 6.8%, the VanEck CLO has an asset size of 0.2406 billion US dollars, with a yield of 6.7%.

Regarding junk bonds, it may be worthwhile to consider actively managed funds that can avoid high default risk bonds. Osterweis Strategic Income emphasizes short-term bonds with issuers holding "sufficient cash and equivalents", with a yield of 5.68%, lower than the 7.4% average of junk bonds. It also falls behind the average return rate of similar bonds over 15 years, but the fund has shown steady performance recently, outperforming 95% of similar funds in the past three years.

Convert some cash into stocks.

As the stock market approaches historical highs, people may tend to stay on the sidelines and wait for a pullback. Investing at fixed intervals can reduce the risk of buying at market peaks.

One bullish signal worth paying attention to is the two-year US Treasury bond yield. Nicholas Colas, co-founder of DataTrek, said that as yields decline, funds are flowing out of money market funds while stocks are rising. In a recent report, he wrote that as the two-year Treasury bond yield falls, "capital is leaving the money market fund 'parking lot' to seek assets with higher risk and potentially better returns."

Some strategists believe that the S&P 500 index will have a bountiful year. Due to the significant weighting of large-cap tech stocks in the S&P 500 index, any downturn in these stocks would pose a risk. John Lynch, Chief Investment Officer at Comerica Wealth Management, leans towards a more balanced approach. He stated, "At this point in this cycle, I'm really not going to put all my chips on one number. I'd like to stay as closely balanced between growth and value as possible."

Lynch is bullish on the medical care industry, expecting a 17% to 18% earnings growth for the industry this year. While the healthcare sector had a poor performance in 2023, it has started to shine in the market early this year. Lynch appreciates its defensive attributes including stable dividends and earnings growth. The Health Care Select Sector SPDR ETF provides broad exposure to the healthcare industry, holding.$Eli Lilly and Co (LLY.US)$(Eli Lilly),$UnitedHealth (UNH.US)$(UnitedHealth Group) and $Johnson & Johnson (JNJ.US)$ (Johnson & Johnson) and other pharmaceutical giants.

Also in the defensive camp is Thornburg Investment Management's Krinhoff, who said: "Positioning oneself among companies with strong moats, regardless of the economic situation, these companies have enough funds to weather the storm." He is bullish on stocks such as $JPMorgan (JPM.US)$ (JPMorgan Chase) and $Charles Schwab (SCHW.US)$(Charles Schwab) and other financial stocks.

Angeles Investments Chief Investment Officer Michael Rosen said that another strategy is to "follow the profits". His investment firm emphasizes growth over value, large-cap stocks over small-cap stocks, and U.S. stocks over foreign stocks.

One mutual fund that investors may consider is Primecap Odyssey Aggressive Growth, which reopened to new investors in December 2022. According to Morningstar data, this fund has underperformed in recent years but has shown excellent long-term performance, with an average annual return rate of 16.33% over 15 years, outperforming 97% of similar mid-cap growth stock funds.

RWA Wealth Partners founder Daniel Wiener appreciates the fund's focus on "achieving growth at reasonable prices," stating that the fund managers look for catalysts that can drive stock performance, particularly valuing their emphasis on biotechnology and technology stocks.

Cash may also benefit from a dividend income strategy. Savita Subramanian, head of U.S. Stock and Quantitative Strategy at BofA Securities, is bullish on dividend-paying stocks, stating that these stocks often have sufficient cash flow to support dividends and carry less risk of dividend cuts compared to the highest yielding stocks.

An ETF that follows this strategy is Vanguard High Dividend Yield, which holds JPMorgan (JPMorgan),$Broadcom (AVGO.US)$(Broadcom),$Exxon Mobil (XOM.US)$(Exxon Mobil) and$Home Depot (HD.US)$(Home Depot) and other well-established large companies with a yield of 3%. Over the past 15 years, this ETF has a return rate of 12.75%, ranking in the top 24% among similar funds.

Editor/Jadyen