Darst & Kaplan: Portfolio Changes

September 12, 2014

With the stock market trading near record highs should investors adjust their portfolios? David Darst and Jay Kaplan say yes! Darst is an independent investment consultant and Senior Advisor and member of the Global Investment Committee at Morgan Stanley. He is also the author of 11 books, including two on mastering the art of asset allocation. Kaplan is portfolio manager of several funds run by small cap pioneer, The Royce Funds, which is known for its value orientation and high quality company focus. We’ll get their personal perspectives on market valuations.

WEALTHTRACK Episode #1112; Originally Broadcast on September 12, 2014

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Darst & Kaplan: Portfolio Changes

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Senior Advisor, Morgan Stanley


Portfolio Manager, The Royce Funds

Consuelo Mack
Where were you on 9/11? That was the question Jack Lund, the CEO of the YMCA of Greater New York asked me and the other members at a board meeting this morning. Lund, who was then head of the Milwaukee YMCA raised a million dollars that day, from Ys across the country to give to the New York City Y system so it could respond to the tragedy. The Y immediately provided help, child care and counseling to Y members who lost friends and family and it provided free overnight lodging to first responders. As Lund noted, Y staffers were grateful that they were part of an organization that could instantly provide aid and support when so many of us were feeling helpless and paralyzed.

I was on my way to work at CNBC in New Jersey that morning and was able to get there before Manhattan went into lock down and shut all access to and from the island.

My husband, whose office was in a building close to the World Trade Center was on the street when he saw the first plane go in. He saw the explosion of the second plane from his office and told everyone to leave immediately. Luckily they did, on foot.

Our then elementary school age son was in class and did not hear about the attacks  until his dad picked him up that afternoon, having walked from lower Manhattan to the upper east side.

That son, now 26 years old and a Marine Lieutenant just returned from his second tour in Afghanistan, which we invaded to defeat Al Qaeda at its source more than a decade ago. He felt it was his duty to serve when the nation was at war.

13 years later we are still at war against a brutal and committed enemy. Last night,   our President made it official by announcing a campaign to attack another Islamic militant group bent on destroying Americans, westerners and other “infidels.”

Once again the U.S. markets and economy are proving their strength and resilience.  They are able to do so because of our constitutionally guaranteed legal and free market system, which is guarded and protected by our law enforcement and military personnel.  It is they who I remember and thank on this 9/11.

We don’t pay too much attention to daily, weekly or even monthly moves in the markets on WEALTHTRACK. As J.P. Morgan once quipped, “the market will fluctuate!”  And so it does and will.

We do, however, look at longer term data to determine how expensive or cheap stock prices are and one of the best measures that we have seen is the creation of Nobel Prize winning economist Robert Shiller and a colleague, John Campbell. As WEALTHTRACK viewers know, Shiller, a frequent WEALTHTRACK guest is a professor of economics at Yale, while Campbell teaches at Harvard.

More than 25 years ago they collaborated and created what they called the “Cyclically Adjusted Price-Earnings ratio, or CAPE Ratio. What the CAPE Ratio does is divide the current price of the market by inflation adjusted corporate earnings, averaged over the prior 10 years, instead of the traditional P/E where the denominator is current earnings.

According to Shiller the ten year history helps “minimize effects of business-cycle fluctuations” and is “helpful in comparing valuations over long horizons”.  Over a year ago Shiller warned that the CAPE Ratio stood at around 23, far above its 20th  century average of 15.21.

In a column in The New York Times last month, Shiller noted that the CAPE was above 25, “a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.”

As Shiller was quick to point out “the CAPE was never intended to indicate exactly when to buy and sell.” It’s been a “very imprecise timing indicator” and in fact has been relatively high, above 20 for almost all of the last 20 years. But here’s the Shiller kicker: over the last century the CAPE has “consistently reverted to its historical mean” of around 15. It fell to as low as 13.2 in the midst of the financial crisis.

This week’s WEALTHTRACK guests are more than aware of how expensive the markets have been and they are adjusting accordingly.

David Darst a familiar guest on WEALTHTRACK is now an independent investment consultant and Senior Advisor and member of the Global Investment Committee at Morgan Stanley. For 17 years he was the Chief Investment Strategist of Morgan Stanley Wealth Management.  He is also the author of 11 books – including two on mastering the art of asset allocation.

Our other guest is a newcomer to WEALTHTRACK, but his firm is not. He is Jay Kaplan, a portfolio manager at small cap pioneer, The Royce Funds, which is known for its value orientation and high quality company focus.

Kaplan manages several Royce funds including Royce Value, and he is a portfolio manager for Royce Total Return and Royce Dividend Value funds with small cap legend Chuck Royce as lead portfolio manager.

We’ll hear their personal perspectives on market valuations and how they are affecting their investment decisions.

As always, if you can’t join us at the appointed hour on your local public television station, you can watch the show on our website, www.wealthtrack.com as a podcast or streaming video. You can also find the One Investment picks of our guests and my Action Points there. For those of you who would like to see our program in advance of the broadcast, you can subscribe to our WealthTrack PREMIUM subscription service on the website.

Plus, this week our web series, WealthTrack WOMEN, will tackle one of the most traumatic transitions of any woman’s life – widowhood – and the best way to handle it financially.   We’ll also have EXTRA interviews with both Darst and Kaplan which are available exclusively on our website.

Have a great weekend and make the week ahead a profitable and productive one.

Best Regards,


Mathews Asia Take a look at the U.S. Treasury’s Floating Rate Notes, or FRNs

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Buckle Inc. (BKE)
Price: $47.48 on 9/10/14
52-week range: $41.45 – $54.76
BKE Chart

BKE data by YCharts


Schlumberger NV (SLB)
Price: $104.06 on 9/10/14
52-week range: $84.91 – $118.76
SLB Chart

SLB data by YCharts

Helmerich & Payne Inc (HP)

HP Chart

HP data by YCharts

Genworth MI Canada (MIC)

MIC Chart

MIC data by YCharts

Schlumberger NV (SLB)

BKE Chart

BKE data by YCharts

Buckle Inc. (BKE)

SLB Chart

SLB data by YCharts

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In recent years, having a home bias has paid off for investors- American stock markets have outperformed other developed markets and trounced the losses in many emerging markets- but will it continue to do so? Two global investment pros, David Darst of Morgan Stanley and Peter Langerman of the Mutual Global Discovery Fund, will discuss where you can find the highest quality businesses at bargain basement prices.

David Darst: Should You Trust the U.S. Financial Markets?

Financial Thought Leader, David Darst, Chief Investment Strategist at Morgan Stanley, where he criss-crosses the globe advising clients. He is also an acknowledged expert in asset allocation and a prolific author. Among his most recent books is a best seller, The Little Book That Saves Your Assets, which I highly recommend. I began the interview by asking David, given recent events, why should investors trust the financial markets.


Additional David Darst appearance on WEALTHTRACK:


David Darst, now Senior Advisor at Morgan Stanley and Independent Financial Consultant has never confined himself to one intellectual or professional pursuit. A true renaissance man, annual attendee of Burning Man, triathlon competitor and prolific author, his recent book Voyager 3: Fifty Four Phases of Feeling, named after two Voyager space probes shares a series of personal experiences through poetry, prose and photography. I asked Darst to describe his next frontier.


Jay Kaplan, Portfolio Manager of several funds at small cap pioneer, the Royce Funds has been managing stock portfolios for nearly three decades. He started his career in bonds. He explains why that early training has made a big difference in managing small company stock funds.

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