Donald Trump predicts stock Armageddon, but stays invested

Donald Trump has warned that, because he sees a recession on the way, now is a "terrible time" to invest in stocks. But in his last financial disclosure, the Republican presidential front-runner's exposure to stocks was hefty.

In an interview with the Washington Post, Trump said he believed stocks were overvalued owing to the Federal Reserve's easy-money policy. This opinion comes despite the price/earnings ratio for the Standard & Poor's 500 standing at 17, which is slightly higher than the long-term average of just under 15, although hardly at nose-bleed altitudes.

Trump's disclosure of his holdings to the Federal Election Commission in July showed he had up to $7.6 million in stock mutual funds and $2.7 million in individual shares, plus $2 million with Paulson & Co. hedge funds, which have a robust presence in equities.

As Gary Brooks, a wealth advisor with Brooks, Hughes and Jones in Tacoma, Wash., told Investment News after reviewing Trump's disclosure, he is "heavy on the aggressive end with individual stocks," somewhat offset by a big cash position, but lacking in sufficient overseas investments and bonds.

Hope Hicks, Trump's spokeswoman, said in an email that Trump liquidated most of his stock portfolio in January 2014, logging a $27 million gain, and that 48 of his 52 stocks went up. This is stated in a press release, not a filing with the government, however.

What remains unclear was why Trump trimmed his stock holdings at a time stocks were climbing, or why he hung onto what he kept. Assuming he did not sell any more of them, he retained a significant equity stake.

To be sure, the bulk of Trump's assets is invested in real estate. He contends his net worth is $10 billion, far in excess of Forbes magazine's estimate of $4.5 billion. The New York tycoon has thus far spurned requests that he make public his tax returns, a step that would shed light on his true financial situation. The FEC permits presidential candidates to report their assets within broad upper and lower limits, so an exact picture is impossible.

An examination of the real estate magnate's asset allocation shows:

Trump at last count kept a sizable stake in stocks. Not as much as he claimed before his 2014 selling, but more than you'd expect from someone warning of a wipe-out. Many of his holdings were in blue-chips like Caterpillar (CAT) and Pfizer (PFE), with a smattering of tech names like Alphabet (GOOG), parent of Google. For the most part, these were held in brokerage accounts.

He favored one mutual fund family with high fees and middling performance. Trump held nine funds run by Baron Capital, which charges above-average fees, north of 1 percent of total assets yearly. Most of their ratings, by research firm Morningstar, were respectable but not stellar. The vast majority of them got three stars, and two had two stars. Only one had five stars. While they have performed OK over time, this year just two are in the black.

His hedge fund holdings were on the risky side. Trump's biggest was BlackRock's Obsidian fund, with up to $50 million invested. This vehicle is dedicated to fixed-income, not stocks, yet don't look at it to offer the safety of Treasury paper and investment-grade corporate bonds. It specializes in junk bonds, emerging market debt and other speculative areas. Junk, also known as high-yield bonds, tends to correlate with stocks.

Trump's second biggest hedge fund investment is in funds run by John Paulson, who gained renown for shorting subprime mortgage debt leading up to the financial crisis.

Paulson made a fortune with this swing-for-the-fences bet. The manager has run into a problem lately, though, with his large stake in flagging Valeant Pharmaceuticals (VRX). While Trump's entry date to Paulson's funds is not known, their Valeant stake is the pharma company's fourth largest. Valeant has lost 90 percent of its value since the beginning of 2014, when Paulson got in.

So despite his warnings about a market death spiral, at last reckoning Trump wasn't heading for the exit himself.