Skittish investors may be ready for more risk in 2013

Traders stand outside the New York Stock Exchange, March 27, 2009.

Credit: Reuters/Eric Thayer

By Steven C. Johnson

NEW YORK | Mon Dec 31, 2012 9:37am EST

NEW YORK (Reuters) - The investment landscape won't be much different in 2013 than it has been this year, but the investors might be.

After spending most of 2012 in a defensive crouch, cowed by past crises and on guard against any future ones, more investors seem willing to take risks in 2013 in hopes of a greater reward, money managers say.

"Managing money with one eye on the rear-view mirror is no fun," said Alan Wilde, head of fixed income and currency strategy at Baring Asset Management, which oversees $50 billion.

With investors a bit less skittish but still starved for yield, Wilde said he expects a "small increase in optimism" to encourage investors to chase higher returns.

Doing so will require creativity as conditions around the world -- advanced economies in particular -- are not conducive to rapid growth. With debt levels and jobless rates high and inflation subdued, most major central banks are committed to holding interest rates near zero for years to come.

Cash may not be an option either. Savings accounts yield virtually nothing and money markets only marginally more. Returns on both are well below the rate of inflation, which when stripped of volatile food and energy costs stood just shy of 2 percent in the year to November.

That panorama, investment managers say, should enhance the appeal of assets such as stocks, high-yielding "junk" bonds, floating-rate loans and mortgage-backed securities.

TOO CONSERVATIVE

Of course, the uncertainty in Washington has had a paralyzing effect. As of late December, talks between the White House and Congress had yet to yield a plan to avert a looming U.S. budget crisis.

Economists fear failure to prevent some $600 billion of automatic spending cuts and tax increases from taking effect as planned in January could thrust the economy back into recession.

While stock markets have wobbled in recent days, investors still seem reasonably confident a deal will eventually get done.

That's quite different from the doomsday thinking that dominated markets in 2012, when at times it seemed the euro would collapse, the bottom would fall out of China's economy and the United States would lurch back into a recession.

"Those kinds of distractions have hounded investors all year, this idea that there was always a disaster just around the corner," said Steven Englander, head of global G10 currency strategy at Citigroup.

As a result, many anxious investors sought shelter in low-yielding bond funds, which took in $297.3 billion this year, according to Lipper data. Stock funds attracted just $13.56 billion in new cash despite double-digit gains for the S&P 500.

But those who did take risks in 2012 did remarkably well, noted Jim McDonald, chief investment strategist at Northern Trust, which oversees more than $700 billion.

The total return, including dividends, of the benchmark S&P 500 through December 27 was 15.3 percent, while financial stocks rose 29 percent after tumbling 24 percent in 2011.

European shares returned nearly 13 percent, while the Barclays Global High Yield Bond Index was up 19.6 percent year-to-date.

Even Greek government bonds rallied once it became clear the country would not be leaving the euro zone, with the 10-year yield falling from around 40 percent in March to 12 percent at year end. Returns were much more modest on benchmark German bund; yields fell from 2 percent to 1.3 percent in that time period.

Northern Trust said it would enter 2013 with "a tactical overweight to risk," though McDonald warned that the slight increase in investor optimism will make returns more modest.

REACHING FOR YIELD

Next year looks like it could be another solid one for equities. Even with 2012's gains, Northern Trust says earnings yields still look attractive, and continued central bank stimulus should provide fuel for further gains.

David Darst, chief investment strategist at Morgan Stanley Smith Barney, favors what he calls the "global gorillas" -- large companies with a global footprint that have exposure to emerging markets, which should grow more swiftly than developed ones.

Dividend-paying stocks from Taiwan, Mexico, Brazil and elsewhere also present a good opportunity to pick up yield, said Michael Fredericks, lead manager of the BlackRock Multi-Asset Income Fund, especially if U.S. dividend taxes rise next year as a result of a deficit reduction deal.

Fredericks said the most promising stocks tend to be those of companies that rely on domestic demand rather than the big exporters that dominate many emerging market mutual funds.

"If you really want to get at the local, organic growth taking place in emerging markets, you have to get more direct exposure to that growth than you would by buying a big exporter whose business depends on U.S. and European consumers," he said.

Of course, investing next year will not be risk-free. Europe's debt crisis could worsen again, the U.S. economy could tumble over the fiscal cliff and into recession, continued turmoil in the Middle East could trigger a spike in oil prices and a global slump.

"It's still a market where you have to be nimble," Darst said. "You still have to drive with both hands on the wheel."

That's especially true in fixed income, where strategists warn against pouring too much money into bond funds with interest rates at record lows.

Even a modest rise in bond yields could do immense damage to bond portfolios, said Rick Rieder, BlackRock's chief investment officer for fundamental fixed income. BlackRock expects 10-year U.S. Treasury yields to rise to 2.25 percent next year from around 1.70 percent currently.

That, he said, means bond investors will have to "take a little bit of credit quality risk" in 2013 and to consider taking on some higher-yielding but less liquid securities.

"We still like high yield, U.S. municipal bonds, bridge loans and structured collateralized loan obligations (CLOs), which give you income without a lot of duration," he said.

Average yields on high-yield corporate bonds, also known as "junk" bonds, were hovering above 6 percent, well above the 1.7 percent available from 10-year Treasuries.

Mortgage-related securities were also likely to be in high demand thanks to the Federal Reserve, which has committed to buying $40 billion of mortgage bonds each month to lower long-term interest rates, boost housing and help the broader economy.

DoubleLine Capital, which oversees more than $50 billion in assets and has favored residential non-agency mortgage-backed bonds this year, was now looking at commercial mortgage-backed securities to help raise returns in 2013, senior portfolio manager Bonnie Baha said at the Reuters Global Investment Outlook Summit in November.

Rieder agreed: "We like owning assets with structural tailwinds to them, such as real estate-related assets. Commercial mortgage-backed securities are one of our favorites."

(Editing by Mary Milliken and Gunna Dickson)

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Stern Advice: Financial to do list for 2013

Balloons are prepared for New Year's Eve celebrations in Times Square in New York, December 30, 2012.

Credit: Reuters/Keith Bedford

By Linda Stern

WASHINGTON | Mon Dec 31, 2012 8:34am EST

WASHINGTON (Reuters) - Make resolutions if you must: When you vow to track every dollar and never waste money again, you feel all clean and shiny for at least a few hours into the new year.

But that doesn't usually last. Resolutions get broken because they are too lofty and too ill-defined. It is better to break your resolutions down into a specific to do list: here are the money moves to make now and in the coming weeks that will insure you're in a better financial place before 2013 ends.

-- Analyze your entertainment budget. Television service used to be free, except for the electricity to run it. Now you have to choose cable versus satellite dish and then add on movies from a host of services (like Amazon, Hulu and Netflix)via a host of devices (like Roku, Apple TV and internet-enabled Blu-ray players). Monthly budgets for a family run well over $100, just for television, so it's worth figuring out what you watch and how you watch it and comparison shop for the cheapest way to do that. Often, cable and satellite providers will cut you a better deal if you say you're ready to quit their service. In today's fast-shifting environment, re-do this analysis once a year at contract renewal time.

-- Put one savings on auto-pilot. There is nothing new or revolutionary about this particular exercise, but it works. Choose a low-cost stock mutual fund from a direct-seller like Vanguard, Fidelity Investments or T. Rowe Price. Authorize the fund to sweep a set amount out of your checking account every month. Even $100 will make a difference over time. Just ignore this fund, except to watch it build over time.

-- Max out your credit cards -- not with borrowing, but with rewards. After five years of tight credit, card issuers are coming back at consumers with a new waves of rewards. Look at all of the cards you already have -- if you haven't paid them off, send all of your available money to the highest rate card until you kill the balances, one at a time, as quickly as possible. Then compare the rewards they pay for travel, groceries, gas and any other categories that are important to you. Check the best offers out there now at Nerd Wallet (link.reuters.com/heh84t).

-- Refinance your mortgage. Make your move now if you expect to be in your home for at least five years. Rates hover near historic lows, and bankers are still willing to lend money for 30 years at 3.25 percent and for 15 years at 2.5 percent. Nobody can predict when rates will rise, but they aren't likely to go down. At some point over the next 10 years, those rates are likely to look excellent. Furthermore, many people who were unable to refinance before because they didn't have enough equity in their homes may get relief from recent increases in home prices. To shop for a good rate, check the listings at MortgageMarvel.com and Bankrate.com, and compare with a couple of local mortgage lenders and your own credit union.

-- Buy life insurance. If you have a family that depends on you, and you don't already have six times your income in term coverage, it's time to buy. Rates have been falling for more than a decade, but now that's over and some are heading back up, says Byron Udell of Accuquote.com. Furthermore, some life insurance companies are giving up on some product lines that they believe are unprofitable in today's low interest rate environment. Shop for term life at Accuquote.com, Intelliquote.com and term4sale.com, and compare rates with independent firms like Geico and -- if you have a military connection -- USAA.

-- Adjust your 401(k) settings. If you just let your company auto-enroll you in the program, there's a good chance you aren't saving enough. Bump up your regular contributions at least to the level your company will match, and higher if you can afford it. Authorize the company that manages your 401(k) to rebalance your assets once a year, to keep your mix of stocks and bonds where you want it to be. That will automatically have you buying lower and selling higher.

-- Update your resume. Many workers have been stalled at work for five years or more. But the economy is improving, so it's a good time to brush up on needed skills, rewrite your resume and start networking via LinkedIn, Twitter, Facebook and your own personal connections. Even if you want to stay where you are, it's a good career move to stay abreast of what's going on all around.

-- Organize your info and look at your money. All good financial planning starts here. If you have balances on your credit cards, make a list of all of your cards, with their effective interest rates and balances. Your debt-payoff strategy will become clear. If you don't know how you spend your money, embrace a program like Quicken or an online aggregator like Mvelopes or Mint. Investing for retirement or otherwise? Find a program or system that allows you to track your investment mix and your returns on a quarterly basis. Set it up now, and your investment decisions will be made easier all year long.

(Linda Stern is a Reuters columnist. The opinions expressed are her own. The Stern Advice column appears weekly, and at additional times as warranted. Linda Stern can be reached at linda.stern@thomsonreuters.com; She tweets at www.twitter.com/lindastern .; Read more of her work at blogs.reuters.com/linda-stern; Editing by Kenneth Barry)

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Analysis: After "fiscal cliff" dive, more battles, new cliffs

Macy Curtis, 11, and her grandparents Sam and Andrea Perrone, all of Snellville, Georgia, visit the U.S. Capitol in Washington, December 29, 2012. President Barack Obama and U.S. congressional leaders agreed on Friday to make a final effort to prevent the United States from going over the ''fiscal cliff,'' setting off intense bargaining over Americans' tax rates as a New Year's Eve deadline looms.

Credit: Reuters/Mary Calvert

By David Lawder and Fred Barbash

WASHINGTON | Sat Dec 29, 2012 4:26pm EST

WASHINGTON (Reuters) - Whether or not the "fiscal cliff" impasse is broken before the New Year's Eve deadline, there will be no post-cliff peace in Washington.

With the political climate toxic in Congress as the cliff's steep tax hikes and spending cuts approach, other partisan fights loom, all over the issue that has paralyzed the capital for the past two years: federal spending.

The first will come in late February when the Treasury Department runs out of borrowing authority and has to come to Congress to get the debt ceiling raised.

The next is likely in late March, when a temporary bill to fund the government runs out, confronting Congress with a deadline to act or face a government shutdown. The third will possibly be whenever the temporary bill replacing the temporary bill expires.

While Congress is supposed to pass annual spending bills before the start of each fiscal year, it has failed to complete that process since 1996, resorting to stopgap funding ever since.

Influential anti-tax activist Grover Norquist predicted in an interview with Reuters that conservatives would wage repeated battles with President Barack Obama to demand budget savings every time the government needs a temporary funding bill or more borrowing capacity.

The so-called "continuing resolutions" to which a divided Congress has increasingly resorted to keep the government operating, provide a "very powerful tool" to pry out spending cuts, said Norquist, president of Americans for Tax Reform.

Republican Senator Bob Corker of Tennessee said he will not be satisfied until there are substantial cuts to federal retirement and healthcare benefits known as entitlements, producing savings in the $4.5 trillion to $5 trillion range.

"Unfortunately for America," said Corker, "the next line in the sand will be the debt ceiling."

Most observers see the $16.4 trillion debt limit as the true fiscal cliff in the new year because if not increased, it would eventually lead to a default on U.S. Treasury debt, an event that could prove cataclysmic for financial markets.

The Treasury Department said on Wednesday it would start taking extraordinary measures by December 31 to extend its borrowing capacity for about two more months.

'POISONOUS CLIMATE'

It was a deadlock over raising the debt ceiling in August 2011 that prompted a deficit reduction deal that led to a key fiscal cliff component, the $109 billion in automatic spending cuts on military and domestic programs.

If the fiscal cliff's spending cuts or tax increases are left even partly unresolved on December 31, the political combat over them will carry over into the new Congress, possibly simultaneously with the debt ceiling debate.

"We would be pessimistic of a quick fix" if the deadline is missed, Sean West, head U.S. analyst at Eurasia Group, a political risk consultancy, said in a note to clients. "The political climate will be poisoned. The new Congress will need time to settle in."

"We are concluding one of the most unsuccessful Congresses in history," Democratic Representative John Dingell of Michigan declared in a statement on Saturday, "noteworthy not only for its failure to accomplish anything of importance, but also for the poisonous climate of the institution."

Dingell, 86, is the longest serving member of the House, elected first in 1955.

Historically, bitter struggles in Congress like that over the fiscal cliff lead to further resentment and strife in a cycle of cumulative grudges that now spans nearly 30 years.

Many analysts and lobbyists in Washington believe the strife could get even worse because the new Congress convening on January 3 will include fewer members from moderate or swing districts and more from districts tilted heavily to the left or the right.

Republicans in particular are likely to face their most serious re-election challenges in 2014 not from Democrats but from conservative Republicans challenging them in primary elections.

"Ironically," said a post-election analysis published by the law firm Patton Boggs, "the voters have elected a 113th Congress that may be even more partisan than the 112th."

(Reporting by David Lawder and Fred Barbash; Editing by Eric Beech)

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Wall Street Week Ahead: Cliff may be a fear, but debt ceiling much scarier

By Ryan Vlastelica, Edward Krudy and Doris Frankel

Fri Dec 28, 2012 8:34pm EST

n">(Reuters) - Investors fearing a stock market plunge - if the United States tumbles off the "fiscal cliff" next week - may want to relax.

But they should be scared if a few weeks later, Washington fails to reach a deal to increase the nation's debt ceiling because that raises the threat of a default, another credit downgrade and a panic in the financial markets.

Market strategists say that while falling off the cliff for any lengthy period - which would lead to automatic tax hikes and stiff cuts in government spending - would badly hurt both consumer and business confidence, it would take some time for the U.S. economy to slide into recession. In the meantime, there would be plenty of chances for lawmakers to make amends by reversing some of the effects.

That has been reflected in a U.S. stock market that has still not shown signs of melting down. Instead, it has drifted lower and become more volatile.

In some ways, that has let Washington off the hook. In the past, a plunge in stock prices forced the hand of Congress, such as in the middle of the financial crisis in 2008.

"If this thing continues for a bit longer and the result is you get a U.S. debt downgrade ... the risk is not that you lose two-and-a-half percent, the risk is that you lose ten and a half," said Jonathan Golub, chief U.S. equity strategist at UBS Equity Research, in New York.

U.S. Treasury Secretary Tim Geithner said this week that the United States will technically reach its debt limit at the end of the year.

INVESTORS WARY OF JANUARY

The White House has said it will not negotiate the debt ceiling as in 2011, when the fight over what was once a procedural matter preceded the first-ever downgrade of the U.S. credit rating. But it may be forced into such a battle again. A repeat of that war is most worrisome for markets.

Markets posted several days of sharp losses in the period surrounding the debt ceiling fight in 2011. Even after a bill to increase the ceiling passed, stocks plunged in what was seen as a vote of "no confidence" in Washington's ability to function, considering how close lawmakers came to a default.

Credit ratings agency Standard & Poor's lowered the U.S. sovereign rating to double-A-plus, citing Washington's legislative problems as one reason for the downgrade from triple-A status. The benchmark S&P 500 dropped 16 percent in a four-week period ending August 21, 2011.

"I think there will be a tremendous fight between Democrats and Republicans about the debt ceiling," said Jon Najarian, a co-founder of online brokerage TradeMonster.com, in Chicago.

"I think that is the biggest risk to the downside in January for the market and the U.S. economy."

There are some signs in the options market that investors are starting to eye the January period with more wariness. The CBOE Volatility Index, or the VIX, the market's preferred indicator of anxiety, has remained at relatively low levels throughout this process, though on Thursday it edged above 20 for the first time since July.

More notable is the action in VIX futures markets, which shows a sharper increase in expected volatility in January than in later-dated contracts. January VIX futures are up nearly 23 percent in the last seven trading days, compared with a 13 percent increase in March futures and an 8 percent increase in May futures. That's a sign of increasing near-term worry among market participants.

The CBOE Volatility Index closed on Friday at 22.72, gaining nearly 17 percent to end at its highest level since June as details emerged of a meeting on Friday afternoon of President Barack Obama with Senate and House leaders from both parties where the president offered proposals similar to those already rejected by Republicans. Stocks slid in late trading and equity futures continued that slide after cash markets closed.

"I was stunned Obama didn't have another plan, and that's absolutely why we sold off," said Mike Shea, a managing partner and trader at Direct Access Partners LLC, in New York.

Obama offered hope for a last-minute agreement to avoid the fiscal cliff after a meeting with congressional leaders, although he scolded Congress for leaving the problem unresolved until the 11th hour.

"The hour for immediate action is here," he told reporters at a White House briefing. "I'm modestly optimistic that an agreement can be achieved."

The U.S. House of Representatives is set to convene on Sunday and continue working through the New Year's Day holiday. Obama has proposed maintaining current tax rates for all but the highest earners.

Consumers don't appear at all traumatized by the fiscal cliff talks, as yet. Helping to bolster consumer confidence has been a continued recovery in the housing market and growth in the labor market, albeit slow.

The latest take on employment will be out next Friday, when the U.S. Labor Department's non-farm payrolls report is expected to show jobs growth of 145,000 for December, in line with recent growth.

Consumers will see their paychecks affected if lawmakers cannot broker a deal and tax rates rise, but the effect on spending is likely to be gradual.

PLAYING DEFENSE

Options strategists have noted an increase in positions to guard against weakness in defense stocks such as General Dynamics because those stocks would be affected by spending cuts set for that sector. Notably, though, the PHLX Defense Index is less than 1 percent away from an all-time high reached on December 20.

This underscores the view taken by most investors and strategists: One way or another, Washington will come to an agreement to offset some effects of the cliff. The result will not be entirely satisfying, but it will be enough to satisfy investors.

"Expectations are pretty low at this point, and yet the equity market hasn't reacted," said Carmine Grigoli, chief U.S. investment strategist at Mizuho Securities USA, in New York. "You're not going to see the markets react to anything with more than a 5 (percent) to 7 percent correction."

Save for a brief 3.6 percent drop in equity futures late on Thursday evening last week after House Speaker John Boehner had to cancel a scheduled vote on a tax-hike bill due to lack of Republican support, markets have not shown the same kind of volatility as in 2008 or 2011.

A gradual decline remains possible, Golub said, if business and consumer confidence continues to take a hit on the back of fiscal cliff worries. The Conference Board's measure of consumer confidence fell sharply in December, a drop blamed in part on the fiscal issues.

"If Congress came out and said that everything is off the table, yeah, that would be a short-term shock to the market, but that's not likely," said Richard Weiss, a Mountain View, California-based senior money manager at American Century Investments.

"Things will be resolved, just maybe not on a good time table. All else being equal, we see any further decline as a buying opportunity."

(Wall St Week Ahead runs every Friday. Questions or comments on this column can be emailed to: david.gaffen(at)thomsonreuters.com)

(Reporting by Edward Krudy and Ryan Vlastelica in New York and Doris Frankel in Chicago; Writing by David Gaffen; Editing by Martin Howell, Steve Orlofsky and Jan Paschal)

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Investors flee into non-U.S. markets as fiscal deal looms: EPFR

By Sam Forgione

NEW YORK | Fri Dec 28, 2012 3:42pm EST

NEW YORK (Reuters) - Investors pumped money into funds that hold emerging market and European stocks in the last reporting week of the year as U.S. lawmakers failed to reach a deal on the looming "fiscal cliff," data from EPFR Global showed on Friday.

Emerging market stock funds pulled in $2.16 billion over the reporting period and European stock funds attracted $913 million in the week ended December 26, the fund-tracking firm said, accounting for most of the $3.6 billion into equity funds worldwide.

Investors have strongly favored bond funds over stock funds this year on expectations that the debt securities offer more stable returns in the face of global concerns such as the European debt crisis, the slowdown in China, and the pending tax hikes and spending cuts that threaten to tip the U.S. into recession early next year.

In the last week, however, emerging market and European debt were the winners, as cash flowed into the countries' stock funds as well as $424 million into emerging market bond funds and $343 million into European bond funds. Bond funds altogether pulled in $419 million in new cash over the period, reversing outflows of $4.1 billion the prior week.

Investors grew wary of U.S. securities overall and pulled $149 million out of U.S. stock funds and $495 million out of U.S. bond funds. Retail investors committed money to U.S. stock funds in just two out of 52 weeks this year, EPFR Global said.

Some analysts have said that the unresolved U.S. budget talks have pushed investors out of the U.S. and into emerging markets and Europe.

"As the crisis du jour becomes the U.S. and the obsession over the fiscal cliff, investors have started to warm up to the idea that international markets look attractive," said Chris Konstantinos, director of international portfolio management at RiverFront Investment Group.

The benchmark S&P 500 index fell 1.1 percent over the reporting period as U.S. lawmakers remained in gridlock over how to resolve the looming "fiscal cliff" of tax increases and spending cuts scheduled to occur early next year.

Over the reporting period, U.S. House Republican Speaker John Boehner failed to win support from his party for a proposal that aimed to limit income-tax increases to those earning $1 million or more, complicating negotiations with President Barack Obama, who has sought higher taxes for a larger slice of wealthy taxpayers.

Many investors cited concerns over the stalled talks as a reason for weak retail sales over the period, while weaker-than-expected data on German consumer morale, lowered economic growth figures in Britain, and slashed economic forecasts in Sweden also weighed on sentiment.

U.S. markets closed early following quiet trading on Christmas Eve and remained closed on the Christmas holiday.

Demand for the safe-haven 10-year Treasury rose on Wednesday on concerns over the status of the budget talks, with the yield falling to 1.76 percent. Yields have since fallen to 1.71 percent in intraday trading Friday ahead of another meeting between President Obama and Democratic and Republican lawmakers.

High-yield "junk" bond funds gained $152 million over the reporting period, reflecting a slightly greater appetite for risk after the funds suffered outflows of $281 million the previous week.

The inflows into high-yield are modest compared to multiple weeks of reported gains in excess of $1 billion this year. Potential federal tax reforms on capital gains under discussion in Washington may be prompting investors to pull back a bit, one investor said.

"Not knowing the tax consequences is going to deter some investors that normally would seek high-yield income," said Alan Lancz, president of Ablan B. Lancz and Associates Inc., an investment advisory firm. (Reporting by Sam Forgione; Editing by M.D. Golan)

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Six ways to optimize your retirement portfolio in 2013

By John Wasik

CHICAGO | Fri Dec 28, 2012 11:31am EST

CHICAGO (Reuters) - You may be waiting to optimize your retirement portfolio, thinking that you should know what's going on in Washington and Europe before you act.

However, there are some changes you can set in motion right now that could make a big difference down the road regardless of what happens with the fiscal cliff, tax changes and Wall Street:

1. Boost your contribution rate

The longer you wait to contribute, the greater return you will need to achieve your goals. Thanks to the compounding effect, the more your contribute, the more you can accumulate when dividends and appreciation are added.

Raise it as much as you can because even incremental changes make a huge difference over time. Let's say you're 35, make $75,000 annually and contribute 6 percent with a 100-percent employer match. You start with $50,000 in your account now. If you just bump your contribution rate to 7 percent, your balance in 30 years would rise from $1.6 million to nearly $1.8 million, according to 401kcalculator.org. In any case, you always want to take advantage of the employer match, because it's free money.

2. Align your allocation to your age

Generally, the older you are, the more fixed-income you need -- roughly matching your bond or guaranteed investment contract portion to your age. Let's say you're 30 and you can afford to take market risk. You'd want 30 percent in bonds and 70 percent in stocks. A 60-year-old, conversely, would consider a 40 percent stocks, 60 percent fixed-income mix.

Target-date or "lifestyle" funds can do this for you, but you have to check their allocations the closer you get to retirement to see if you're comfortable with the stock mix. They are all slightly different.

3. Don't worry too much about taxes now, but have a tax plan in mind.

While it's hard to tell what Congress will do with the fiscal cliff dilemma, no one has talked about eliminating the tax break for 401(k)-type plan contributions, which are not subject to federal taxes. You can contribute up to $17,500 in 2013; another $5,500 for those over 50 or for individual retirement accounts.

Concerned about taxes down the road? That's reasonable. Consider a contribution to a Roth IRA or Roth 401(k). The contributions are taxable, although the withdrawals are not if you hold money in these accounts for at least five years past age 59 ½.

4. Lower expenses to boost return

Surprisingly, low-cost index funds accounted for only 30 percent of the assets in top-rated 401(k) plans surveyed by Brightscope for 2012. Every retirement plan should have index funds to cover U.S. and international stocks, bonds and real estate.

Here's what you can do if you don't already have that setup: You probably received a notice earlier this year detailing how much each investment option is costing you. If any of your individual funds cost more than 0.75 percent annually, you should pick a different one.

If you don't have enough options in your company plan, you can ask your employer to find cheaper index funds, which are available for as low as 0.06 percent annually. If you do this, you will easily boost your plan's performance without changing the risk profile or allocation, and it will also pay you back every year in the form of a higher net return.

5. Buy constantly and hold

Most people time the market badly. The best time to buy stocks is during the dips. Most investors can't stomach this idea, though. At the end of 2008, when stocks were really cheap, 401(k) investors only had 37 percent allocated to stocks, and at the end of the dot-com bubble in 2002, investors had 40 percent in stocks, according to the Employee Benefit Research Institute (EBRI).

What you should do is invest during good times and bad. You have no idea when bull and bear markets are going to start or stop. So if you can afford to take the risk, take advantage of the compounding over time.

6. Cut back on your employer's stock

This could be the most dangerous holding in your portfolio, concentrating a great deal of risk in one company. While you may feel a need to be loyal to your employer, it's not in your best interests. You'd be better off diversifying.

Look at what you sectors you don't have represented in your portfolio. Asset classes that are typically under-represented include real estate investment trusts, inflation-protected bonds and global stocks/bonds. Fortunately, only 8 percent of those surveyed by EBRI hold company stock. If this is still a major holding in your portfolio, make some changes. This also applies to holding single stocks.

(Follow us @ReutersMoney or here. Editing by Beth Pinsker Gladstone and Phil Berlowitz)

(The author is a Reuters columnist and the opinions expressed are his own)

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Would-be adoptive parents look beyond Russia

Orphan children play in their bedroom at an orphanage in the southern Russian city of Rostov-on-Don, December 19, 2012.

Credit: Reuters/Vladimir Konstantinov

By Kathleen Kingsbury and Lauren Young

NEW YORK | Fri Dec 28, 2012 8:18pm EST

NEW YORK (Reuters) - Russia's new ban on U.S. adoptions is the latest setback for hopeful American parents as countries increasingly impose restrictions.

Other countries, including China and Guatemala, have erected hurdles for adoptive families as they create their own domestic adoption programs. The signing of the Hague Convention on adoption in 2008 drastically improved regulation of the process, which had been rife with corruption. But it has also led to a slowdown in adoptions or shutdowns in some countries. Internal politics and abuse concerns are additional reasons why countries have tightened controls.

In 2004, U.S. citizens adopted 22,991 children who had been born abroad, an all-time high, according to Adoptive Families magazine. By 2011, that number had fallen to 9,319. For a graphic view of how international adoptions have fallen in various countries, see link.reuters.com/tut84t

There are still other options for Americans wanting to adopt an international child. Bulgaria, Colombia and many African nations are some of the new, go-to countries for U.S. adoptions.

But even that's not a sure thing. For would-be adoptive parents the best bet is to widen their search to include special needs kids, sibling groups and older children.

AFRICA'S ADOPTION EXPLOSION

Africa, which represented 22 percent of adoptions in 2009, is expected to be a bigger player in the future. "A decade ago, there were very few adoptions (in Africa)," according to Susan Soonkeum Cox, vice president policy and external affairs at Holt International, a Christian adoption organization. "Now, there's an explosion."

African countries seeing an increase in adoptions include South Africa, the Democratic Republic of the Congo, Ghana, Kenya and Ivory Coast.

Adoptions in Ethiopia, meanwhile, have declined from a peak of 2,511 in 2010 as the country overhauled its oversight process. But it is still a viable option, Cox said.

Cox advises working with an adoption agency that has staff on the ground in Africa and other countries to handle paperwork and advocate for U.S. families.

Other countries that still welcome American adoptions include Bulgaria and Colombia, said Megan Montgomery, international adoption coordinator for Adoption Star, based in Amherst, New York. Adoption Star primarily deals with adoptions from Bulgaria, a country that has gone from five placements in 2008 to 75 adoptions in 2011.

Placements from Vietnam and Cambodia, which shuttered their U.S. adoption programs, should resume soon, adoption experts say.

FAMILIES CAN'T FLIP A SWITCH

Adoptions of Russian children peaked in 2004, according to Dale Eldridge, coordinator of adoptive services at Jewish Family Services' Adoption Choices, a non-profit adoption program based in Framingham, Massachusetts. Right now, fewer than 50 U.S. adoptions of Russian children are formally in the works while another 250 U.S. families have identified kids they would like to adopt, adoption experts said.

Unfortunately, families that already have started an adoption in Russia can't just flip a switch and redirect their efforts to another country. "I wish it was as simple as taking some families who have been waiting (for Russian children) to just move over to another country," said David Nish, chief program officer at Spence-Chapin, a U.S.-based adoption agency that finds homes for children in the United States and around the world. "But it's a whole other process."

That's because every country has its own eligibility requirements. Criteria can include parents' marital status, age of the parents, employment, financial status, medical issues, and even the age difference between the adoptive parents and adoptee child. The adoption process remains restrictive for single-sex couples.

And the cost can be prohibitive. For example, the median fee in 2011 was $8,000 for the Dominican Republic, $15,355 in Panama and $26,063 in South Africa, according to the U.S. State Department's Intercountry Adoption Annual Report. Adoption fees for many of the 30-plus countries on the State Department's list are in the range of $20,000. That's not including travel costs.

Even so, international adoptions are often cheaper than domestic ones for newborn babies, which can cost $40,000 or more.

OLDER CHILDREN

To speed up the process, would-be adoptive parents should consider a school-age child, experts say.

According to the State Department, 233,934 international adoptions were made by Americans from 1999 to 2011. Nearly 94,000 of those adoptions involved children under the age of one. Just about 20,000 children aged three or four were adopted during that period. And for kids aged 5 to 12, it was 29,712.

The benefit of adopting a school-age child is that it is easier to identify developmental and emotional problems ahead of time. "There's more you can do to prepare and put resources in place to support what they need," Spence-Chapin's Nish said.

School-aged children can be challenging if pre-adoptive experiences affect their development, he said.

A special needs child is also a possibility. One way to fast-track an international adoption may be to apply for a child with known medical or special needs, said Adoption Star's Montgomery. "For families with resources, it can be great option," Montgomery said. "Of course, you really have to find the right family to take on that kind of known medical need."

Special needs can range from a baby born with a minor medical problem, such as a cleft palate, to more serious issues, such as a heart condition, blindness or spina bifida. "It's not about families getting a child quicker," Nish said. "It's about a family accepting a child into their household that they can provide for and love and nurture."

China's Waiting Child program, which includes children who have special needs or correctable medical conditions or are part of sibling groups, has wait times that are typically much shorter than the traditional program, according to Adoptive Families magazine. In 2011, more than half of adoptions from China were through this program.

Would-be parents must be prepared to wait. The Associated Services for International Adoption, a non-profit adoption group, says the wait time for an adoption referral in China is 73 months as the country has clamped down on U.S. adoptions. "If the wait time is becoming impractical, it's better to close the intake process" and start again, advised Holt's Cox.

Tracy Downey and her husband, Jason, who live in suburban Des Moines, Iowa, tried to go the traditional international Chinese adoption route in 2006. But after waiting for 18 months to bring home a baby from China, Tracy switched gears and started combing the official Chinese list of children with special needs along with additional lists from adoption agencies and orphanages.

The Downeys have since adopted a daughter, Angel, along with two sons - Corban and Tegan - from China, all with large, potentially disfiguring moles known as a giant congenital nevi. They started the process to bring home the two boys, now aged 3-1/2, last January. It took about 10 months.

Aside from their large moles - which are on two of the children's faces and on the other's lower body - all three kids are healthy and thriving, Tracy said.

"If we wanted a non-special needs child, we'd still be waiting," Tracy said.

(This version of the story has been corrected to fix spelling of Colombia in fourth paragraph)

(Follow us @ReutersMoney or here; Additional reporting by Chelsea Emery and Beth Pinsker Gladstone; Editing by Linda Stern and Steve Orlofsky)

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UBS and too-big-to-punish: James Saft

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The sinking of "Plan B"; the U.S. "fiscal cliff" disaster of John Boehner

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Your one-week year-end "fiscal cliff" money plan

A man walks past the U.S. Capitol Building in Washington December 17, 2012.

Credit: Reuters/Joshua Roberts

By Linda Stern

WASHINGTON | Wed Dec 26, 2012 12:57pm EST

WASHINGTON (Reuters) - By now, we thought the path forward would be clear and the usual six-day flurry of tax-focused check writing and income-shifting could commence.

But we're still in wait-and-see mode; watching to see what happens next. Either Washington will rush through a year-end package of tax and spending cuts or we will plunge over the so-called "fiscal cliff" of tax increases and sharp spending cuts. Even if that happens, President Obama and Congress could agree on a retroactive package early next year that would limit the repercussions of the over-the-cliff scenario.

So, what do you do now? Avoid placing huge bets and consider these moves while you're watching your government in (in)action.

-- Stash cash for January. It's probably going to be a rough month. Even if there's an 11th hour cliff plan, it is unlikely to reinstate the 2 percentage point cut in Social Security payroll taxes that all workers have been benefiting from for the last two years. That means families with median household income of $50,500 will take home $84 less a month in 2013 than they did in 2012.

Furthermore, January is always a month of reckoning with holiday bills, high heating costs, a resetting of health insurance deductibles and scant balances in flexible spending accounts. So, you're going to need cash. You may even hold on to some money you don't need to disburse until April (like Roth individual retirement account contributions), just to make sure you will have enough on hand to get through January.

-- Shift income based on your income. If you live in a high-tax state, have kids and make between $33,750 and $49,500 ($45,000 to $76,000 for couples), you are a sitting duck for the alternative minimum tax. Originally conceived as a method of insuring that rich people don't get out of paying taxes altogether, the AMT has morphed into an extra tax that penalizes large families and those who pay high local taxes. Congress usually mitigates that by "patching" the AMT rules so they only apply to higher incomes; in 2011 the AMT hit singles earning more than $48,450 and couples earning $74,450. Without a patch moving those numbers up by roughly 2 percent for 2012, they will fall all the way back to $33,750 for singles and $45,000 for couples. It's not entirely clear that a patch can be passed to be effective retroactively for tax year 2012. That is true even though the Internal Revenue Service and TurboTax are already acting like the patch will emerge.

To play that cautiously, don't race to pay your state property taxes before the end of the year. While that could cost you money in April because you will have lower deductions, it will secure your deductions for next year and perhaps protect you from the AMT in 2012, should the patch fail to materialize.

Feel confident that you'll get patched? Write the check now.

-- Sell. If you have not been part of all the selling on Wall Street, there is still time. Your capital gains will be taxed at a rate of 15 percent or less if you sell before the end of the year. In 2013, that rate stands a decent chance of going up to 20 percent. There's no harm in taking the gain now; you can re-buy the same security right away if you want to keep holding it.

-- Write the charity checks. If you itemize deductions they will offset income taxes for 2012, and there's certainly plenty of need wherever you look now. If you are wealthy, you stand a decent chance of having your deductions clipped next year, so you might as well write the checks now.

If you're retired, don't itemize deductions and have been turning over your required minimum IRA distribution to a charity, don't expect the same tax break you got last year. That provision - to allow non-itemizers a tax-free IRA withdrawal if it goes to charity - expired at the end of last year. Maybe it will come back, but that's a very long shot now. Write the check anyway, if you just want to be charitable, but not if you can't afford it without the write-off.

-- Plan to be frugal. There's no version of a "fiscal cliff" resolution that ends with a more expansive government fiscal policy. Either your benefits will be clipped -- in the form of less college financial aid, curtailed Social Security benefits and the like -- or your taxes will go up. Over the long term, items like deductions for mortgage interest on second homes and employer write-offs for health insurance could be in play. Consumers already have shown themselves to be more frugal than they used to be -- holiday-linked retail sales growth slowed significantly once the fast-track "fiscal cliff" fix went off the rails. Households have been paying down debt for much of the last five years. It couldn't hurt to keep that up for a while.

(Linda Stern is a Reuters columnist. The opinions expressed are her own. The Stern Advice column appears weekly, and at additional times as warranted. Linda Stern can be reached at linda.stern@thomsonreuters.com; She tweets at www.twitter.com/lindastern .; Read more of her work at blogs.reuters.com/linda-stern; Editing by Dan Grebler)

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Consumer sentiment weakens as fiscal crisis looms

1 of 3. Job seekers stand in line to meet with prospective employers at a career fair in New York City in this file photo taken October 24, 2012.

Credit: Reuters/Mike Segar/Files

By Jason Lange

WASHINGTON | Thu Dec 27, 2012 2:14pm EST

WASHINGTON (Reuters) - U.S. consumer confidence fell more than expected in December, hitting a four-month low as a looming fiscal crisis sapped what had been a growing sense of optimism about the economy.

The report heightened concerns that a failure by Washington to avert planned tax hikes and spending cuts could lead households to close their wallets, threatening an economic recovery that has been steady albeit lackluster.

Other data on Thursday highlighted the positive momentum building in the economy, with the number of Americans filing new claims for jobless benefits falling to a nearly 4-1/2 year low and new home sales hitting their highest level since April 2010.

But gauges of business sentiment have weakened recently on worries Washington will go forward with plans to slash the federal deficit by about $600 billion in 2013.

Now consumers also appear apprehensive, a sign worries about the so-called "fiscal cliff" could bite into household spending.

The Conference Board, an industry group, said its index of consumer attitudes fell to 65.1 from 71.5 in November.

A sub-index measuring how consumers feel about their present situation rose to its highest level in more than four years, but a gauge of sentiment about the future plunged to its lowest point in more than a year.

"Consumers are increasingly preoccupied with the potential damage the fiscal cliff will cause to the economy and to their wallets if a deal is not reached soon," economists at RBS in Stamford, Connecticut, wrote in a research note.

Separately, the Labor Department said initial claims for state unemployment benefits dropped 12,000 last week to a seasonally adjusted 350,000, the Labor Department said.

"This recent improvement in the claims data is potentially a favorable signal for the labor market," said Daniel Silver, an economist at JPMorgan in New York.

After spiking in the wake of a mammoth storm that ravaged the East Coast in late October, new claims have dropped to their lowest levels since the early days of the 2007-09 recession. The four-week moving average fell 11,250 last week to 356,750, the lowest since March 2008.

The claims data has no direct relation to the government's monthly employment report, but it suggests the surge in layoffs since the recession has at least run its course.

Still, many economists think hiring may remain sluggish even as the pace of layoffs ease.

Companies in recent months have been adding to their payrolls at a lackluster pace, and analysts expect the employment report due on January 4 will show 143,000 jobs were created in December, down from 146,000 in November.

"A significant improvement in labor market conditions ahead of any resolution to the fiscal cliff is unlikely," said Michael Gapen, an economist at Barclays in New York.

U.S. stocks opened flat but turned lower as the Senate Democratic leader derided Republicans for the lack of progress in budget talks and warned that a fall off the "cliff" appeared inevitable. Investors sought safety by buying U.S. Treasury debt and the dollar, which rose against the euro.

Following a truncated holiday break in Hawaii, U.S. President Barack Obama returned to Washington to restart talks to avoid the brunt of the fiscal cliff's impact, which would likely put the U.S. economy back into recession if not lessened.

HOLIDAY CAVEAT

The signs of progress in the claims data also included a caveat, at least for the latest week.

Obama declared Monday a holiday for federal workers and many state offices followed suit and were unable to provide complete data for last week's jobless claims. Data for 19 states was estimated, although 14 of those states submitted their own estimates, which tend to be fairly accurate.

The holiday season can make it more difficult to adjust the claims data for normal seasonal fluctuations, another reason to be cautious about the report for last week.

Separately, the Commerce Department said new U.S. single-family home sales rose in November to a 377,000-unit annual rate, while the median sales price jumped 14.9 percent from the same month in 2011, the latest signs the U.S. housing recovery is gaining some steam.

In a fourth report, the Chicago Federal Reserve Bank said its index of factory activity in the U.S. Midwest increased in November to 93.7 from a revised 92.2 in October.

(Reporting by Jason Lange; Additional reporting by Richard Leong and Ryan Vlastelica in New York; Editing by Neil Stempleman)

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U.S. retailers scramble after lackluster holiday sales

By Nivedita Bhattacharjee and Jessica Wohl

Wed Dec 26, 2012 5:08pm EST

n">(Reuters) - The 2012 holiday season may have been the worst for retailers since the 2008 financial crisis, with sales growth far below expectations, forcing many to offer massive post-Christmas discounts in hopes of shedding excess inventory.

While chains like Wal-Mart Stores Inc and Gap Inc are thought to have done well, analysts expect much less from the likes of book seller Barnes & Noble Inc and department store chain J. C. Penney Co Inc.

Shares of retailers dropped sharply on Wednesday, helping drag broader indexes lower, as investors realized they were likely to be disappointed when companies start to report results in a few weeks' time.

"The broad brush was Christmas wasn't all that merry for retailers, and you have to ask what those margins look like if the top line didn't meet their expectations," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group.

Growth was always expected to slow this season, though an improving employment picture and rising home values had helped mitigate the worst fears. But then Superstorm Sandy hit the East Coast in late October, mild weather blunted sales of winter clothing and rising concern about the "fiscal cliff" became more of a reality, dragging down already-pessimistic forecasts.

The latest sign of trouble came from MasterCard Advisors Spending Pulse, which reported holiday-related sales rose 0.7 percent from October 28 through December 24, compared with a 2 percent increase last year.

The preliminary estimate from SpendingPulse was in line with other estimates showing weak growth during the holiday season, when retailers can book about 30 percent of annual sales - and in many cases, half of their profit.

"It has been a very uneven industry performance, probably at least for the last year, and that certainly continued into the holiday season," said Michael Niemira, chief economist at the International Council of Shopping Centers, in an interview with Reuters Insider.

The latest holiday season could end up the weakest since 2008, during the last recession, when sales actually declined. The National Retail Federation had previously predicted 4.1 percent sales growth this year, versus a 5.6 percent increase a year earlier.

Markets reacted sharply to the gloomy outlook.

The S&P retail index closed down 1.7 percent, and 14 of the top 20 decliners in the broader S&P 500 were retailers or consumer brands.

INVENTORY CRUSH

To be sure, the actual percentage change in holiday sales can differ substantially, depending on which group is calculating the figure. SpendingPulse and the National Retail Federation, for example, look at different categories, which can cause some variation in their forecasts.

Regardless of how bad the figure is, one concern for retailers is that soft sales will mean an excess of inventory that will force some to slash prices.

The day after Christmas, retailers were using deep discounts to lure shoppers. Among other brands, Barnes & Noble offered 50 percent discounts in stores via email promotions on Wednesday, while Ann Inc had half-off at its Loft stores, and Macy's Inc's Bloomingdale's promoted discounts of up to 75 percent in some cases.

At a Target store in New York City's Harlem neighborhood, most shoppers seemed to be spending more on groceries, toys and small gifts than on gadgets or clothes.

Despite discounts of 50 percent, there were few takers for Jason Wu glass ornaments, Oscar de la Renta canvas totes and other designer goods launched under the mass merchant's tie-up with upscale chain Neiman Marcus.

Even in a good year, retailers would have offered discounts to lure customers, but some suggest a weak year has now forced their hands.

"Retailers are no longer chasing sales, they are chasing inventory management. That means the discounts that they would have liked to be at 50-60 (percent) off have climbed to 75 to even 80 (percent) off," said Marshal Cohen, chief industry analyst at The NPD Group.

This week's cold, snowy weather on the heels of a warm start to December could spur people to use the gift cards they received or their remaining discretionary income to buy everything from jackets to snow blowers, said Evan Gold, senior vice president of client services at Planalytics, which tracks weather for businesses including retailers.

In December, he said, "people are out spending anyway, weather can trigger what you purchase, not if you purchase, but what you purchase."

SANDY AND CLIFF

A variety of factors were thought to be at fault for the weak season, starting with Superstorm Sandy, which depressed sales in the U.S. Northeast in late October and early November.

Sales recovered in the second part of November, with early hours and promotions helping drive traffic during the "Black Friday" weekend after Thanksgiving, analysts said.

But there was a deep lull in early December as a winter storm in parts of the United States may have limited sales, said Michael McNamara, vice president of research and analysis at MasterCard SpendingPulse.

On top of that, there were fears that taxes will rise in the new year if Washington cannot negotiate a solution to the end-of-year "fiscal cliff" dilemma.

A recent Ipsos poll for Reuters found that only 17 percent of shoppers were spending less due to cliff fears, though analysts said the damage was still done.

"The government usually does not have a role in holidays but this year they did. They got right in the midst of it, the timing couldn't have been any worse," NPD's Cohen said.

BRIGHT SPOTS

One bright spot has been online sales, which continue to grow at a faster pace.

On Christmas Day, online sales jumped 22.4 percent, outpacing the 16.4 percent increase in 2011, according to IBM Digital Analytics Benchmark, which tracks more than 1 million e-commerce transactions a day from 500 U.S. retailers.

Whether online or off, some of the winning retailers were expected to be Wal-Mart, which attracted shoppers with early deals on the night of Thanksgiving and kept its focus on value, and apparel chains like the Gap, whose bright sweaters were successful, according to analysts.

Toys sold well, and hot items that were harder to find later in the season included certain Mattel Inc Barbie dolls and LeapFrog Enterprises Inc's LeapPad2 tablet computer, according to B. Riley Caris analyst Linda Bolton Weiser.

For retailers that have struggled, analysts said all hope was not lost. Many have fiscal quarters that end in January, so they still have time to benefit from a post-Christmas rebound. Because Christmas fell on a Tuesday, some said they could even see a boost this week from people who have extra time off.

"There's still a little bit more time to go until the holiday season is officially over," Morningstar analyst Peter Wahlstrom said.

Wal-Mart shares ended down 0.8 percent at $67.99 on Wednesday, while Macy's shares were down 1.1 percent at $37.11, Barnes & Noble shares were down 3.5 percent at $14.49, Amazon.com Inc shares ended 3.9 percent lower at $248.63, and Ann Inc shares lost 5.1 percent to close at $32.06.

(Reporting by Brad Dorfman, Nivedita Bhattacharjee and Jessica Wohl in Chicago; additional reporting by Chuck Mikolajczak and Dhanya Skariachan in New York; writing by Ben Berkowitz; editing by Jeffrey Benkoe and Matthew Lewis)

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Consumer confidence hits four-month low in December

NEW YORK | Thu Dec 27, 2012 10:14am EST

NEW YORK (Reuters) - Consumer confidence fell to a four-month low in December as a looming budget crisis sapped what had been a growing sense of optimism about the economy, a private sector report released on Thursday showed.

The Conference Board, an industry group, said its index of consumer attitudes fell to 65.1 from a downwardly revised 71.5 in November. Economists had expected a reading of 70.0, according to a Reuters poll.

November's number was originally reported as 73.7.

While the present situation index rose to 62.8 from an upwardly revised 57.4, its highest in more than four years, the overall survey suggested most consumers expect things to worsen.

"Consumers' expectations retreated sharply in December resulting in a decline in the overall index," Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement. "The sudden turnaround was most likely caused by uncertainty surrounding the oncoming fiscal cliff."

The fiscal cliff refers to $600 billion of automatic tax increases and spending cuts set to take effect in January unless Congress acts to stop them. President Barack Obama and Republican leaders have failed to agree to a long-term deficit reduction deal that would avert the situation.

The expectations index fell to 66.5 from a downwardly revised 80.9. December's reading was the lowest in more than a year.

Franco said a similar pullback in consumer expectations was seen in August 2011, when political bickering over raising the U.S. debt ceiling led to a sharp drop in the stock market.

Consumers' labor market outlook also turned a bit more pessimistic. The "jobs hard to get" index fell to 35.6 percent from a revised 37.4 percent the month before, but the "jobs plentiful" index also fell to 10.3 percent from 11.0 percent.

Consumers' expectations for inflation in the coming 12 months held steady this month at 5.6 percent.

(Reporting by Steven C. Johnson; Editing by Chizu Nomiyama)

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Top 2013 predictions for savers, spenders and taxpayers

Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009.

Credit: Reuters/Rick Wilking

NEW YORK | Thu Dec 27, 2012 9:52am EST

NEW YORK (Reuters) - New Year's Eve bells will ring in more than confetti showers and new diets. For consumers, January 1 will usher in fresh laws, regulations and trends that will immediately affect their spending and saving power, regardless of "fiscal cliff" decisions.

Reuters Money Team tapped financial professionals for their top predictions about health care, real estate, credit cards, college costs and other topics.

Following are edited excerpts.

CREDIT CARDS

John Ulzheimer, president of consumer education at SmartCredit.com:

I think some people will start getting credit card offers in the mail who haven't gotten them in past few years.

The credit card issuers will go deeper into the FICO pool (a credit-scoring model) when it comes to prospecting, and so the people who do not have good credit - those with credit scores around 600 to 680 - will have access to credit again.

They'll think that's good, but they've already proven they don't know how to use it. It's like giving an alcoholic beer again. The worst thing you can do for somebody who has bad credit is saddle them with more debt.

REAL ESTATE

Svenja Gudell, senior economist for Zillow Inc:

We think that by the end of 2013 most markets will have hit a bottom. We will continue to see home values appreciate. We'll see inventory tighten up, and I think that home sales could keep climbing.

It's funny that this seems rosy. It's almost like we're getting back to normal. Any positive seems extremely amazing, but really we're on our way to getting back to normal.

TAXES

Kathy Pickering, executive director of The Tax Institute at H&R Block Inc:

The thing that we know is that your payroll taxes are going up. The payroll tax holiday has expired (so) everyone will see a 2 percent increase in their taxes, or a decrease in their take- home pay.

Bob Meighan, a certified public accountant and vice president of TurboTax, owned by Intuit Inc:

I think we will continue to see people remaining focused on saving.

For many taxpayers, the tax refund is the biggest financial payday of the year, bar none. It's close to $3000 on average. I think we'll continue to see people invest their tax refund in meaningful ways (such as) paying down debt. And then a smaller percentage (of the refund used for) non-essential things like travel or home improvements. I don't think we'll see people spending (the refund) on non-essentials, like big-screen TVs.

BANK ACCOUNTS

Anisha Sekar, vice president of credit and debit products for NerdWallet, a financial reviews website:

Banks will continue to raise fees - quietly, region by region. That will especially be the case in so-called shadow fees that consumers don't always notice, like overdraft charges and out-of-network automated teller machine fees.

And we will see extra cuts in bank services, with cheaper checking accounts that steer customers online and try to wean them off in-person services entirely. Pre-paid debit cards as an alternative to checking accounts will become more mainstream.

PAYING FOR COLLEGE

Mark Kantrowitz, publisher of Fastweb.com and FinAid.org, websites for planning and paying for college:

Grants will fail to keep pace with increasing college costs. Because the grants aren't keeping pace, college will become less affordable and it puts more of the burden on students and their families.

HEALTH CARE

Carrie McLean , senior manager, Customer Service & Retention at eHealthInsurance:

Health insurance consumers will find themselves more and more in the driver's seat. People haven't been thinking about the insurance market, but it's going to turn into a buyer's market.

In October 2013, that third quarter, people will see what is going to be available for January 2014. That's nine months away. Insurance companies will have to come up with those plans, and they will have to educate people about them.

Also, during next open enrollment, some employers may drop coverage because their employees will be able to get coverage through exchanges in 2014. That's a big deal. I think people will feel like they don't know enough about health insurance. And so it's going to be a matter of educating consumers.

RETIREMENT

Alison Borland, Aon Hewitt's vice president of retirement strategy:

I think we'll be seeing more creative and institutional solutions to help individuals to create that lifetime income stream, and annuities will be a piece of that.

INVESTMENTS

Marilyn Cohen, money manager and editor, "Bond Smart Investor":

The best-case scenario is that we collect our coupons without any runs, hits or errors. That would be a dream come true after all these years (of rising bond prices). But the worst-case scenario is that we have a major selloff and repricing, and that has some ugly consequences.

I don't know which of those it will be, but my guess is that it will be one or the other, nothing in the middle.

I think interest rates will stay in the same old trading range, but we'll have to watch the Federal Reserve and the inflation numbers and the credit spreads - and the politicians, too.

Tom Lydon, editor, ETF Trends:

(This) will be a great year for exchange-traded funds for four reasons. First, fixed-income ETFs continue to offer a wide variety of choices (domestically and globally) as investors search for yield and diversification.

Second, even though there is a concern about capital-gains taxes in 2013, there will be continued demand for dividend-oriented ETFs as many investors are under the $250,000 income level (targeted by President Obama for higher investment taxes)and also use ETFs in their qualified plans.

And third, money market reform will have to be resolved one way or the other. Some $2.8 trillion in money market funds are at play if they are no longer deemed safe. Look for Pimco Investments and Guggenheim Investments to compete for this money with their short-duration Treasury offerings - Pimco Enhanced Short Maturity ETF and Guggenheim Enhanced Short Duration Bond ETF.

Finally, if the global economy gets traction and investors gain confidence in equities again, a greater percentage of the money that left equity mutual funds in the last three years will go back into the market via ETFs. Investors appreciate the transparency, liquidity and low fees.

(Follow us @ReutersMoney or here . Writing and editing by Lauren Young, Linda Stern, Chelsea Emery, Beth Pinsker Gladstone, Heather Struck; editing by John Wallace)

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Home prices rose for ninth straight month: S&P

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Credit debt, tax reform, low savings keep money pros up at night

NEW YORK | Fri Dec 21, 2012 8:02am EST

NEW YORK (Reuters) - If you're reading this article after Dec 21, the Mayans got it wrong. The world is still here.

But there's still plenty to worry about, financial experts say. Below are excerpts of what the top money professionals told Reuters Money about their concerns for consumers in 2013:

JOHN ULZHEIMER, PRESIDENT OF CONSUMER EDUCATION AT SMARTCREDIT.COM:

Over the past two years, the terms for most credit cards have been changed to variable rates tied to the prime rate from fixed rates. If a variable rate is tied to an index, the credit card issuer doesn't have to notify you.

It's a mathematical certainty that the prime rate will go up; it can't go any lower. So, any debt incurred from that date going forward will be more expensive than you're already paying, which is already too much.

ANISHA SEKAR, VICE PRESIDENT OF CREDIT AND DEBIT PRODUCTS FOR NERDWALLET.COM:

My major focus of concern is transparency. Overdraft fees and prepaid debit cards are confusing, and consumers may not be able to take in their disclosures in a way that is meaningful. I'd like to see a focus on presenting information in a way that consumers can understand.

GREG MCBRIDE, SENIOR FINANCIAL ANALYST AT BANKRATE.COM:

Despite an obvious bubble in bonds, there is still a lot of money moving into them, even though equities are showing better valuations. Investors are still very risk-averse. The point at which investors start to embrace risk is going to be at the wrong end of the economic cycle. It will happen too late to benefit the economy.

MARILYN COHEN, MONEY MANAGER AND EDITOR, "BOND SMART INVESTOR":

The bond markets aren't as deep as they once were, so who is going to be the ultimate buyer of bonds when a big sell-off repricing occurs? There are new rules based on how much proprietary trading can go on; if there are massive liquidations in high-yield bond funds, who are you going to call?

SVENJA GUDELL, SENIOR ECONOMIST FOR ZILLOW:

After a pretty good 2012, I have been sleeping fairly well, but of course there are still risk factors. One of the biggest ones is negative equity. Currently 28.2 percent of homes are still underwater, that's going to cast a fairly long shadow.

STUART RITTER, SENIOR FINANCIAL PLANNER AT T. ROWE PRICE:

Auto-enrollment in retirement plans gets people to save, but it doesn't get them to 15 percent of their income, which means they face a radically curtailed lifestyle in retirement.

Right now, people are typically saving 3 percent, 4 percent or somewhere around the plan sponsor's match formula. That's just not enough to live on in retirement.

All the research shows that plan design is a powerful signaler to people. They are looking to their employer for guidance on what to do. We need to make sure they have auto-increases in their plans to get them to that 15 percent number.

ALISON BORLAND, AON HEWITT'S VICE PRESIDENT OF RETIREMENT STRATEGY:

What keeps me up at night is tax reform. The reason is that retirement plans are such a huge percentage of accounts. I'm very concerned that they are going to be a target at the expense of the future financial security of American workers.

CARRIE MCLEAN, SENIOR MANAGER, CUSTOMER SERVICE & RETENTION AT EHEALTHINSURANCE:

With the Supreme Court decision and the Presidential election, the fate of the Affordable Care Act is no longer an issue. But is there enough awareness? We take thousands of calls from consumers, and what comes up is that people think that the big part of healthcare reform takes place in January 2013.

We see people applying for health insurance now and getting declined, sometimes because of pre-existing conditions, and they are wondering why that is still happening. I feel like my hands are tied because so many people just don't understand it.

KATHY PICKERING, EXECUTIVE DIRECTOR OF THE TAX INSTITUTE AT H&R BLOCK INC:

The main thing that's keeping us up at night is the uncertainty - not knowing what's coming from the fiscal cliff negotiations.

(Outside of the fiscal cliff) one of the things we're really trying to prepare our clients for is the implementation of health care. We know it's here to stay. Now people really do need to get ready for it.

This coming year is a critical moment in time - your 2012 tax return will be the defining record of your income, which will help determine your eligibility for a health care subsidy. So we need to start talking to people about the tax implications of health care and helping them get ready to make those decisions for themselves.

BOB MEIGHAN, VICE PRESIDENT AT TURBOTAX, OWNED BY INTUIT, AND A CERTIFIED PUBLIC ACCOUNTANT:

Come January 1st, 140 million taxpayers will be thinking about their tax return.

I worry about people overlooking valuable deductions and credits. For example, the earned income tax credit is overlooked by 20 percent of all taxpayers. That credit can be worth up to $3800. It's unfortunate that the credit ... is also one of the most difficult to compute if you're doing it manually.

MARK KANTROWITZ OF FINAID.ORG:

Short-sighted steps to cut spending will ultimately hurt college access and completion, especially if changes are implemented without adequate testing and analysis.

The failure of grants to keep pace with increases in college costs is shifting more of the burden of paying for college onto the backs of students and their families. This is making college less affordable and causes increases in the average debt at graduation. More graduates (and dropouts) are struggling to repay their loans. The new income-based repayment plan, Pay as you Earn, will help, but not all borrowers are aware of their options.

Given that college graduates pay more than twice the federal income tax of high school graduates, we should be increasing spending on student aid (especially grants), not cutting it.

HOWARD LINZON, CO-FOUNDER AND CEO OF STOCKTWITS, A SOCIAL NETWORK FOR INVESTORS AND TRADERS:

Taxes and the government worry me the most. Taxes aren't going to solve our problems. I worry about the government because we are over-supervised, in general, but under-supervised in financials. There hasn't been any change yet in that behavior.

I'm hoping we are near the end in this cycle. If not, there's a lot of pain ahead. People will save more instead of spend more, which doesn't help the economy. They will just hoard.

TOM LYDON, EDITOR, ETF TRENDS:

The Securities & Exchange Commission recently announced that they'll be lifting the freeze on active exchange-traded funds that use derivatives. This may open the floodgates for new active entries into the ETF market from fund companies that missed the boat during the initial growth stage of ETFs.

Will American Funds and T. Rowe Price make a huge splash in the ETF world? Probably not, but we're going to have to watch as many big-name firms take a stab at it.

(Reporting by Linda Stern, Lauren Young, Chelsea Emery, Beth Pinsker Gladstone, Heather Struck; Editing by Bernadette Baum)

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Bank investors seek well behaved cost-cutters

By Laura Noonan

LONDON | Fri Dec 21, 2012 12:43pm EST

LONDON (Reuters) - Investors will be looking for banks that can cut costs, pay dividends and stay out of trouble next year as 2012's across-the-board rally wanes.

Unless they picked the high-risk 'peripheries' of Spain, Italy and Greece, investors in bank shares were almost guaranteed to be on to a winner this year as the rising tide from a steadier euro zone lifted all lenders.

"The 2012 story was about recovering from concerns about the euro zone banking scenario," said Andrew Lim, banking analyst with Espirito Santo. "We began the year with a lot of systemic risk in the system. That's been addressed."

Pension funds, savers and hedge funds with holdings in the benchmark Eurostoxx 600 banks index enjoyed share price growth of 25 percent this year, which trumped a 14 percent uplift in the cross-industry benchmark Eurostoxx 600.

But with fears of a euro-zone break-up receding, investors are now focusing on which lenders can make a decent return in a weak economy. With earnings under pressure, that means cutting costs.

"There's been a significant shift to value being given back to shareholders," said Espirito Santo's Lim.

With compensation the banking sector's biggest expense, the focus up to now has been on pay.

In 2007, Credit Suisse paid out 16.1 billion Swiss francs in pay and benefits. By 2011, that figure had fallen to 13.2 billion Swiss francs - a saving of about 3 billion Swiss francs ($3.2 billion) a year, or an extra 2.27 Swiss francs in earnings per share.

But after several years of salary cuts and bonus reductions, which chimed nicely with the public mood for vengeance against errant bankers, executives have already lopped off the low-hanging fruit.

"The bonus adjustment will be broadly complete this year, now it's about operational efficiency," said Deutsche Bank's UK banking analyst Jason Napier.

Cutting staff is the new vista for reducing the pay bill. Switzerland's UBS is leading the European cull, announcing plans to cut 10,000 jobs as it winds down the investment banking arm fined $1.5 billion this week for rate rigging.

Britain's Barclays is expected to announce thousands of cuts and a raft of efficiency measures on February 12 when newcomer chief executive Antony Jenkins unveils the results of a group-wide review.

The programs are invariably costly in the short term but shareholders seem happy to play the long game.

When Citigroup announced 11,000 job cuts on December 5, its shares rose 6 percent.

In addition to culling staff, banks will be shutting bank branches, streamlining suppliers and investing in IT.

Shares in Spain's Banesto rose 18 percent when parent group Santander said this week it would fully absorb the unit, closing 700 branches, to cut costs.

PAST MISDEEDS

On the earnings side, the challenge of a sluggish economy is unhelpfully accompanied by the prospect of banks facing more bills for past misdeeds.

Over the last two weeks, HSBC has been fined $1.9 billion, the largest ever penalty levied on a bank, to settle a U.S. probe into laundering money for drug cartels while Switzerland's UBS has agreed to pay $1.5 billion for its role in a rate-fixing scandal.

The rate rigging controversy, which also cost Barclays $450 million, is set to gather pace next year with Britain's RBS expecting to be fined by next February, while more than a dozen banks such as Deutsche Bank, Citigroup, J.P. Morgan and HSBC remain under the spotlight.

Lawyers believe interest rate manipulation has caused extensive losses to investors and borrowers worldwide meaning that payouts in civil cases could run into tens of billions of dollars.

Annoyingly for investors trying to pick out the banks with the cleanest past, the misdemeanors are not restricted to the high-risk world of investment banking.

A scandal over the mis-sale of insurance products to consumers in Britain has already cost UK banks 13 billion pounds and customers have an unlimited amount of time to make a claim.

DIVIDEND EQUALS SAFE

More positively, Deutsche's European banks analyst Matt Spick said 2013 could be an important year for "normalization" amongst Europe's banks, as the healthier ones wean themselves off emergency liquidity supports and the sector winds down an aggressive spate of asset sales enforced by regulators.

Spick sees dividends as an important way of distinguishing the cured banks from the more challenged ones.

"If regulators have given banks approval to return cash to shareholders that signals that the banks are safe," he said.

Last year, 21 of the 46 Eurostoxx banks paid dividends of more than 2 percent, suggesting a good number of banks have managed to convinced regulators of their soundness.

The sector continues to attract fans; in its December European Investment Strategy outlook, Bank of America Merrill Lynch identified banks as an ‘outperform', noting that tail risks would recede.

Deutsche's Spick expects bank shares to rise by up to 10 percent next year, while Espirito Santo's Lim expects an uplift of 10 to 15 percent.

In the broader analyst world, there are 1.3 times as many buy recommendations as ‘sells' today. A year ago ‘buys' were 1.5 times more prevalent than ‘sells'.

"People are more cautious," said IG Index analyst Christopher Beauchamp, who compiled the figures.

"A lot of ground has been made up in the last few months, so the market does finish much higher but it's been choppy progress."

(Editing by Carmel Crimmins and Philippa Fletcher)

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Analysis: Apple's swoon exposes risk lurking in mutual funds

Attendees sit in front of an Apple logo during the Apple Worldwide Developers Conference 2012 in San Francisco, California June 11, 2012.

Credit: Reuters/Stephen Lam

By David K. Randall

NEW YORK | Fri Dec 21, 2012 1:41pm EST

NEW YORK (Reuters) - The nearly 28 percent decline in shares of Apple Inc since mid-September isn't just painful to individual shareholders. It's also being felt by investors who chased hot mutual funds that loaded up on Apple as the stock raced to a record $705 per share.

Apple makes up 10 percent or more of assets in 117 out of the 1,119 funds that own its shares, according to data from Lipper, a Thomson Reuters company. Those big stakes have contributed positively to each fund's annual performance to date, with Apple still up about 32 percent for the year. It was trading at $527.73 soon after the opening on Friday.

But that year-to-date outcome may not accurately reflect the performance of the funds for individual investors. All told, approximately $4.5 billion has been added to funds with overweight stakes in Apple this year, according to Morningstar data. The majority of these dollars were invested after March and after Apple first exceeded $600 per share - meaning many investors have been riding down with the decline.

The $302 million Matthew 25 fund, for instance, holds 17.4 percent of its assets in Apple, according to Lipper. The fund's 31.9 percent gain through Thursday makes it one of the top performing funds for the year.

Most of its Apple shares were bought years ago at a bargain basement price of about $125 per share. But $158.9 million of the fund's assets - or 53 percent - were invested after the end of March, when Apple was trading near $615 per share, according to Morningstar data.

For those investors that bought after March, all that concentration in Apple hasn't led to a stellar gain but rather a drag on the portfolio. Someone who invested in Matthew 25 in early April has seen the value of the fund's Apple stake fall about 19 percent, while someone who invested at the beginning of September has watched that outsized Apple stake drop 27.2 percent.

In turn, the majority of the fund's investors have reaped a much more modest performance than its year-end numbers suggest. Since the end of March, the fund has gained 6.7 percent, according to Morningstar data, far less than its 31 percent year-to-date gain and about two percentage points more than the benchmark Standard & Poor's 500 index.

Since, September the fund is down nearly 3 percent through Thursday's close, compared with a 1.1 percent decline in the S&P 500 in that period.

The impact of Apple's falling stock price shows some of the drawbacks of portfolio concentration, experts say. These stakes can leave the funds overexposed to the ups and downs of one company - counter to what most mutual funds are supposed to do for investors.

"Any time you get over 10 percent of the portfolio in one company it's a red flag," said Michel Herbst, director of active fund research at Morningstar. Many fund managers do have risk management rules that prevent them from devoting more than 5 percent to 6 percent of their portfolio to any one stock, he said.

Then again, some funds purposely invest in just a few stocks. Mark Mulholland, the portfolio manager of the Matthew 25 fund, said that taking concentrated positions in companies is the only way to beat an index over longer periods of time.

'RIGHT-SIZING' PORTFOLIOS

Along with concerns about iPhone sales in China and tax-motivated selling among people who want to avoid potentially higher capital gains taxes in 2013, the wide fund ownership of Apple may be a factor in the size of the stock's recent declines, fund managers said. In addition, with so many funds already heavily invested in the high-priced stock, there may be fewer marginal buyers available to push prices up again when shares begin to dip.

"The stock didn't go from $700 to $520 because people didn't like the new iPad. It's become a favorite short of hedge funds because they know they can get in on this," said Mark Spellman, a portfolio manager of the $300 million Value Line Income and Growth fund with a small position in Apple.

Short interest in the stock rose to 20.6 million shares at the end of November from 15.1 million shares at the end of September, according to Nasdaq.

"Some of my competitors have 12 percent of their assets in Apple, which I think is ludicrous", said Spellman, who said the company is no longer trading on its fundamentals.

Sandy Villere, who has a 2.5 percent weighting of Apple in his $276 million Villere Balanced fund, said that some mutual fund managers are selling shares because of the over-weighting.

"Right now many people who did take huge overweight positions are right-sizing their portfolios to get it in line with their regular weightings," he said.

Still, some bullish investors see the stock's recent declines as a buying opportunity.

Mulholland, the Matthew 25 portfolio manager, continues to say that shares should be priced at over $1,000 per share based on his valuation of the company at 10 times enterprise value divided by earnings before interest, taxes, depreciation and amortization (EBITDA). Apple trades at about 7 times that figure now.

Wall Street analysts' average price target as of Thursday is $742.56, according to Thomson Reuters data. But Mulholland is happy to be more bullish than his peers.

"I'm glad that I'm able to get it at these prices," he said.

(Reporting By David Randall; Editing by Jennifer Merritt)

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Why you need to gauge your human capital

A man holds his briefcase while waiting in line during a job fair in Melville, New York July 19, 2012.

Credit: Reuters/Shannon Stapleton

By John Wasik

CHICAGO | Fri Dec 21, 2012 11:38am EST

CHICAGO (Reuters) - The end of the year is a good time to illuminate your personal financial situation in a different way. Instead of focusing exclusively on financial capital - how much money you have accumulated - look at your human capital.

This calculus of human capital, which economists wonkily define as "the net present value of your lifetime earnings," matters as much to your lifelong financial situation as the size of your nest egg.

When some people gauge their human capital, they find that they are not making enough money and decide to make some changes. That could mean starting a second or third career.

A former chemist I know has become a financial planner. A friend moved from technical support manager to business architecture analyst, a big jump from fixing computer systems to restructuring an entire company.

While my tech-support friend was forced to evaluate his human capital in short order this year - he was laid off - his was a model case for how to do it.

First, he looked at the assets at his disposal, which included a termination package, outplacement services, training and a healthy emergency fund. Then he determined his immediate and future monetary needs, the most pressing of which was paying the COBRA premium to maintain his healthcare coverage.

After enhancing his presence on social media, he brushed up on his speaking skills through a Toastmasters club and began talking to recruiters. Eventually, he found a position with a smaller company as a business architecture consultant. While he was no longer directly providing tech services, he managed to leverage his background into a job he finds rewarding.

Investing in your human capital means scanning your personal balance sheet like this and figuring out how to find a happier balance between work, family, leisure and passionate pursuits.

Here is what you have to do to run your own numbers:

1. Figure out a retirement plan:

A general rule of thumb is that you need to cover from 60 percent to 80 percent of your pre-retirement income with savings, pensions and Social Security. There are plenty of retirement calculators available, including one at Bankrate (link.reuters.com/ceb84t).

2. Plan for big expenses:

Saving for college for yourself or your children can be daunting. You can figure out how much you will need by plugging numbers into online calculators such as the one at link.reuters.com/deb84t). Consider other major expenditures that are likely to crop up as well: weddings, travel, real estate, healthcare costs and so forth.

3. Act like an actuary

Similar to measuring financial portfolio risk, you need to tally career risk and health risk. If you are in an unstable company or industry, you will need to think about how to find better work.

Be honest with yourself about your mental stability, too. This is a linchpin for human capital, because you will have trouble moving forward if you are depressed. Sad people make poorer financial decisions, according to a recent paper published in Psychological Science. Attend to your mental well-being now, and you can make better choices for your portfolio.

4. Do the math

When merging your financial and human capital reviews, you need to strike a balance. If you choose to switch careers, you will need to quantify how much to change spending and savings.

One comprehensive tool is a program called ES Planner (basic.esplanner.com), which focuses on how to maintain your standard of living given all of the variables I have mentioned.

With that information, do a "lifetime balance sheet." As Boston University economist Zvi Bodie suggests, put your financial assets and human capital in one column. On the other side, list liabilities such as taxes, retirement spending, pre-retirement consumption and other numbers.

5. Be ready to act

If your asset side comes up short, do something about it. The point of doing this analysis is to come to some conclusions about your life.

If you do this sort of work on your stock portfolio, you would rebalance your holdings at the end of it, not just note the conclusions and muse about their importance. Treat your human capital with the same kind of respect.

Follow us @ReutersMoney or here

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Editing by Beth Pinsker Gladstone and Lisa Von Ahn)

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Hedge fund Sloane Robinson hit by emerging market slowdown

By Tommy Wilkes

LONDON | Fri Dec 21, 2012 7:26am EST

LONDON (Reuters) - The slowdown in emerging markets is hitting hedge fund Sloane Robinson hard, highlighting how, even as the industry attracts investors, managers can quickly fall from grace if they fail to perform.

The London-based stock-picker - one of the capital's oldest managers and once among its 10 biggest - has seen assets under management slide to around $2.5 billion, down more than four-fifths from a 2008 high of $15.1 billion.

Assets in the firm's flagship emerging markets fund - run by chief investment officer Richard Chenevix-Trench - have fallen to around $700 million, down from $1.8 billion at the end of 2011, and investors are bracing for a second consecutive year of losses.

"...Emerging market investment, as in so much of the world, has become about a search for niches of growth, where businesses can find room to develop irrespective of the slowing economies and still meet or exceed the expectations currently baked into prices," he wrote in a client letter obtained by Reuters.

The fund is down 1.7 percent to November 30, the letter shows. Last year it lost 17.2 percent. In 2010 made just 2.7 percent.

The fund has its biggest exposure to South Korea, Singapore, India and Hong Kong/China, where shares hit their lowest level in four years last month.

Chenevix-Trench also said in the letter he hiked a position in Samsung Electronics to 5 percent, believing markets will reassess its valuation relative to Apple.

He had indicated he would step down from his role for a six month break from March 2013 but a source familiar with the firm said the manager had now shelved the plan.

Dozens of hedge funds are struggling to adapt to the share price volatility brought by an economic slowdown in key markets like China, India and Brazil. The MSCI Emerging Markets Index is only 5 percent ahead of its 2010 level - in contrast with the 450 percent rally in the 2003-2007 period.

Greg Coffey, one of London's best-known traders, made his name and fortune between 2004 and 2007 trading emerging markets, but subsequently struggled with losses and in October said he was retiring, aged 41, from Moore Capital.

This year the average fund has made less than half the MSCI index's 14 percent rise, Hedge Fund Research shows.

NEW FUND

Sloane Robinson told investors in September that Chenevix-Trench's fund would be transformed into a more diversified global mandate while his Asia fund, which suffered big 2011 losses, would be shut, a second source close to the firm said.

The manager will launch a new emerging markets equities strategy to replace the re-mandated fund, the source added.

Hugh Sloane and George Robinson, both prominent donors to Britain's ruling Conservative Party, founded their hedge fund in 1993, years before Europe's now-dominant managers started out in the late 1990s and early 2000s.

The firm ran $15.1 billion in assets in 2008, making it the sixth biggest European hedge fund, according to Hedge Fund Journal's EUROPE50. This year, at end-June, it ranked 32nd with $3 billion in assets and that has since fallen to $2.5 billion.

Some of the firm's other funds have also fared badly. The International Portfolio is down 6.2 percent to November 30 - the third year of losses in a row. The smaller Frontier and Japan funds have made double-digit gains this year but are still to make their clients money since they launched.

Sloane Robinson declined a request for comment.

(Reporting by Tommy Wilkes; Editing by Mark Potter)

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