Winning fund managers explain 2011 market strategyAs 2011 begins, many strategists are optimistic about the year ahead, expecting the recovery to continue to bestow stock market gains after a 13 percent lift for the Standard & Poor's 500 in 2010.
By: Gail MarksJarvis, Chicago Tribune
As 2011 begins, many strategists are optimistic about the year ahead, expecting the recovery to continue to bestow stock market gains after a 13 percent lift for the Standard & Poor's 500 in 2010.
But analysts debate whether the best gains this year are likely to come from U.S. or emerging-market stocks, and some are suggesting a move away from U.S. Treasury bonds.
For insight, we looked at what three acclaimed fund managers are doing with their portfolios. All are current or recent winners of Morningstar's Fund Manager of the Year awards.
ROBERT GOLDFARB AND DAVID POPPE: Managers of the Sequoia Fund, which invests in U.S. stocks. Goldfarb and Poppe, who won Morningstar's Domestic Equity Manager of the Year award for 2010, say they didn't focus on the direction of the stock market last year and have no idea where it will be a year from now. Rather than predict the market, they say they merely try to find "terrific companies" that have been reliably growing earnings and managing well, performing in the long run even if short-term market conditions are a drag.
Their Sequoia fund ranked seventh among competitors last year and has outperformed for more than 10 years because the managers do "deep, individual-company research," said Morningstar analyst Karen Dolan.
While the Sequoia managers do not make market predictions, they don't ignore economic conditions. They think cyclical companies, or those dependent on strong growth, could be challenged by a still-sluggish economic environment and are consequently avoiding trucking and machinery and have sold bank stocks.
Goldfarb said that just as the expansion over the past decade was unsustainable because "it was fueled by a huge boom in consumer debt," the apparent strength lately has been "bolstered by unsustainable public debt."
"There will be a day of reckoning," Goldfarb said, adding that he doesn't know when or just how it will play out because the government might choose various options. "It could go the path of austerity like in the U.K., and in that case you would want to own businesses that will do well in austerity. But it's also possible the government might address it by inflation."
In that case, "businesses with pricing power would have the easier time," Goldfarb said. So would "businesses that generate massive free cash" and don't have large needs for working capital and fixed investment, he added.
He cites utilities as an example of companies that could be pressured in a highly inflationary environment, because "they require enormous capital expenditures."
So while utilities are often categorized along with health care stocks as "defensive" in uncertain times, Goldfarb does not see them that way.
He also is not particularly fond of health care stocks because "I don't like companies that are highly regulated." Still, there are exceptions, such as Valeant Pharmaceuticals International, a company he likes because a lot of the products are sold overseas and because the "chief executive is very wary of reimbursement risk."
While retail stocks are generally seen as risky at a time when consumers remain burdened with debt, Poppe notes that they don't see TJX (TJ Maxx stores) or O'Reilly Auto Parts stores that way.
As people are frugal, they trade down to stores such as TJ Maxx, and if your car breaks down, "you don't have a choice ... you fix it," said Poppe. He notes that about 99 percent of the people who walk into an O'Reilly store make a purchase.
WILLIAM FRIES: Manager of Thornburg International Value fund, which invests in stocks outside the U.S. Fries, who won the Morningstar International Stock Fund Manager of the year award in 2003 and was recently recognized by Morningstar analyst William Samuel Rocco for 14 years of great results, thinks U.S. economic growth will be stronger than expected this year, perhaps more than 3 percent.
He sees risk easing in the U.S. and said the greatest threat in the next decade could be "a tragic regulatory error," such as China's leaders making mistakes as the nation transitions from an economy focused on building infrastructure to a more consumer-focused economy.
Despite his optimism about the global economy over the next year, Fries has purchased few new stocks over the past couple of months.
"There is always something of value out there, but at a time when there's a market run like we've had, you need to be a little careful," he said.
Fries expects China and India to keep building infrastructure, which should drive demand for commodities such as coal, copper and iron ore in addition to energy. Consequently, he holds BG Group, Seadrill Limited and Cenovus Energy. Yet, after energy stocks climbed about 17 percent as a group in 2010, Fries is not expecting gains as strong this year.
Fries typically devotes about 20 percent of his portfolio to what he calls emerging franchises, or companies with great growth potential. Among them is HTC Corp., which develops smart phones. But after recent gains in fast-growing stocks like HTC, Fries said he would wait to buy more in a stock market downturn.
As the economy recovers, he's holding more retail stocks than typical, and they range from LVMH group, which produces luxury Louis Vuitton fashions, to H&M, a low-cost clothing store expanding in Asia. They both execute well, Fries said, and he will buy more "if the market gives us a chance."
He has reduced exposure to sovereign debt risks in Europe by selling institutions such as Italian bank Intesa Sanpaolo, but he said he holds ING and has increased exposure to Germany-based Siemens and France-based advertising firm Publicis, which will benefit from digital advertising growth on Facebook and Google.
MICHAEL HASENSTAB: Manager of the Templeton Global Bond fund. Hasenstab, who was named Morningstar's Fixed-Income Manager of the Year for 2010, is skeptical of U.S., European and Japanese bonds, but that doesn't mean he is avoiding everything in developed countries.
He likes bonds from Norway, Sweden, Australia and Israel, and such emerging countries as Indonesia, South Korea and Brazil "that have been more responsible" about debt than the U.S. and Europe. Some also pay substantially higher yields than U.S. Treasurys, in part because inflation is rising in fast-growing economies, he said.
Hasenstab said he can get higher yields without substantial risk in Australian bonds maturing in two years and yielding about 4.5 percent. Because of inflation and the risk of interest rates climbing, he prefers bonds that mature in three years or less.
While he doesn't own U.S. Treasury bonds, Hasenstab said there's been an overreaction to California general obligation municipal bonds. The state has a "messy budget process" rather than solvency issues, he said, and its debts are nowhere near as serious as Greece's.
For the U.S., Europe and Japan, "I'm skeptical of massive debts, weak economic activity and pursuing extraordinary monetary policy like printing money. I'm concerned about the value of their currency," he said.