UBS is planning a mass mailing to many of its brokerage clients alerting them that they have been reclassified as “aggressive” investors following a recent change in its market outlook that some people inside the firm say reflects growing bearishness in the bond market, particularly over the long term, the FOX Business Network has learned.
The move by the brokerage firm comes as the stock market, as measured by the Dow Jones Industrial Average, today hit the 14,000 level — its highest point since the beginning of the financial crisis in late 2007, and as government bond prices have begun to fall.
In late January, UBS (UBS) changed its “strategic asset allocation guidelines,” or the broad parameters used to classify its brokerage clients depending on their mix of stocks, bonds and other investments in their portfolio, people at the company tell FOX Business.
According to brokers inside UBS, new guidelines will reflect a growing belief among the firm's market strategists that the bull market in bonds has largely run its course, and that those investors who believed they had constructed a “conservative” portfolio by being heavily invested in bonds could be reclassified as “aggressive." Some also believe the move may be an attempt by the firm to lessen its liability in the event clients who are holding large positions in bonds decide to take legal action against UBS.
Mike Ryan, the chief investment strategist for UBS, said so-called “non consent” letters will be sent out to investors in the coming weeks alerting them of their changed classification – but he says it has little to do with a firm-wide bias against bonds. Rather, UBS is changing “its long-term view” reflecting what it views as a “volatile market…not just in fixed income.”
He said the new classifications are unrelated to the firm’s shorter-term outlook that takes a dim look on the fixed-income market, particularly government bonds, over the next year.
Still, the move is controversial inside UBS; some brokers worry that many of their best clients will see the changes jarring, possibly leading to an exodus to other firms.
Others say it’s the right move since the Federal Reserve at some point will have to raise short-term interest rates (currently close to 0%), and end its quantitative easing program, which involves the Fed's purchase of government bonds, which helps depress long-term interest rates and prop up bond prices (yields move in the opposite direction from price).
The Fed has signaled that it plans to maintain its current interest rate policy for at least the next year amid a sluggish US economy, but there are signs that the long bond market rally is running out of steam. Investors continue to pour money into mutual funds that invest in bonds ($10.6 billion in December, according to Lipper Inc.).
But after four years of steady outflows, investors are now putting more money into stock mutual funds than they are pulling out of them, Lipper says. Meanwhile, yields on the U.S. government’s benchmark bonds have begun to rise. Yields on the 10-year Treasury have surged to a 9-month high of 2%, from a low of 1.38% in late July.
Some brokers inside UBS are hoping that the firm’s management will reconsider the new models, which they believe are too Draconian. If not, investors are expected to receive notices by March.
Charles Gasparino joined FOX Business Network (FBN) in February 2010 as Senior Correspondent.