* Ivy Asset fund's Avery prefers stocks over bonds
* Earnings yield on stocks highest Avery has seen
* Loomis Sayles' Gaffney says to avoid U.S. Treasuries
By Tim McLaughlin
WASHINGTON, May 11 (Reuters) - Money manager Michael Avery, known for making big swings in his $27 billion Ivy Asset Strategy Fund, is out of bonds and into stocks, saying on Friday that fixed income securities won't keep pace with inflation.
"At the end of the day, I have to take the money of individuals and families and retain their purchasing power," Avery said during a panel discussion at the Investment Company Institute's annual meeting in Washington D.C. "You can't do that hiding in cash and 10-year treasuries."
Stocks, by contrast, look appealing on basic fundamental measures, Avery said. He said he does not mind equities greater volatility, especially when the earnings yield on stocks easily outpaces meager Treasury yields.
"The earnings yield on the S&P 500 is about 7 percent. I can't remember when its been that high before," Avery said. The U.S. Treasury 10-year note yield was 1.81 percent on Friday.
Avery said there may be near-term volatility in stock markets, but not nearly as much as seen in the unrest of the 1970s and 1980s.
The giant Ivy fund Avery co-manages with Ryan Caldwell is one of the few U.S. mutual funds that can invest the majority of its assets in all types of assets and go short, strategies more typical of hedge funds. The fund had 81 percent of its assets in global equities and just 0.02 percent in government bonds at the end of March, according to the fund's web site.
Avery sometimes makes rapid moves into bonds and cash and uses stock index futures to hedge the equity side of his portfolios. Back in 2008, he put almost half the fund's assets into cash.
Two years ago, Avery and his firm, Waddell & Reed Financial Inc, were at the center of the investigation into the stock market's "flash crash" crisis that temporarily erased $1 trillion in capitalization. Avery had put in a multibillion dollar order to sell S&P index futures at the start of the crash. Regulators later concluded multiple factors caused the sharp descent.
Over the past 10 years through the end of March, Avery's fund has averaged a gain of 10.82 percent compared to the S&P 500's average annual total return of 4.12 percent. The fund's top holdings at the end of March were Wynn Resorts Ltd (5.7 percent), ConocoPhillips (4.5 percent) and Sands China Ltd (3.7 percent).
Most individual investors have done the opposite of Avery. People that piled into bonds for their relative safety will sustain heavy losses when interest rates eventually rise, executives at top U.S. management firms warned this week at the ICI conference.
Kathleen Gaffney, co-manager of the $21 billion Loomis Sayles Bond Fund, agreed that investors are taking on a tremendous amount of market risk with their bond investing.
"The sectors most sensitive to a rise in interest rates are Treasuries and high-quality corporate bonds," Gaffney said during Friday's ICI panel discussion. "I tend to think of this as return free and high, high risk."
Gaffney's fund, which she runs with Dan Fuss and several other co-managers, had no holdings of U.S. Treasury or agency debt at the end of April, according to the fund's web site.
Instead, 24 percent was invested in investment grade bonds, 22 percent was in non-U.S. dollar bonds, 18 percent was in high yield and 12 percent was in Canadian dollar-denominated bonds. The fund also held smaller stakes in other sectors including preferred/equity investments, bank loans and municipal bonds.