Eight mutual fund managers weigh in on the buying opportunities to get your boomer clients back on track.
It should be easy. Boomers accumulate assets as they build up their retirement savings, and "de-cumulate" assets as they spend it down.
As we all know by now, it's not that easy. Boomers are dealing with the worst financial crisis since the Great Depression, just as the bulk of the largest demographic ever seen hits retirement age. And it's forced them to now re-accumulate (we shudder at the term) assets, and quickly.
But how is this done?
Each year, the "Finding Alpha" feature of our annual mutual fund issue is especially popular. With all that's happening, we expect it to be doubly so this year. Which is why it's on the cover.
We asked top mutual fund managers where they're finding the good deals, and what's just over the horizon that's getting them excited. We were expecting shrugged shoulders, but instead got engaged managers thinking creatively to find the alpha their clients want.
Trends emerged; some expected, others completely new. Whatever the case, these managers can help advisors get their boomer clients back on the retirement track.
Tom Ognar
Portfolio Manager
Wells Fargo Advantage Growth Fund
It's a great time to be growth investors. Growth stocks certainly got knocked down with everything else, but they represent a great opportunity at the moment, especially in the technology sector. Traditionally, we haven't fished hard in technology, which we view as growth cyclical. But we blank out the name of the company in a specific sector to be as unbiased as possible when examining the investment opportunity.
Right now the enterprise value to free cash flow, one important valuation metric, is the best we've seen since 1985. One knock against technology was that companies spent their free cash flow on capital expenditures, but that is much more subdued now. The sector also reacted very well to recent market volatility. They cut manufacturing in keeping with demand. That flexibility has served them well.
In the terrible 2000s (for technology) the sector under-performed the broader market for seven of the last nine years. We feel they'll perform much better going forward. So companies like Cisco, those with wide moats, will perform well. Also, we're seeing extremely attractive dividend yields. If you look back to 20 or 30 years ago, dividends were a major part of total returns. We're seeing that start to come back.
Bob Millen
Co-Portfolio Manager
Jensen Portfolio
We look only for high quality growth companies that have a consistent outlook for the future, high returns on equity and invested capital, and a sustainable competitive advantage. We also require 15 percent ROE for 10 consecutive years and $1 billion in market cap at a minimum. We've identified 150 companies that meet these criteria. We further require them to be trading at a significant discount to what we believe is their full value. When we add this in, we've identified 28 companies that meet these combined criteria.
We agree with economists that predict slow growth. We believe inflation and interest rates will rise due to more government intervention in monetary policy. So it's better to be in companies with pricing power, and slower growth in the U.S. means they should have a worldwide footprint. In the information technology space we like Microsoft and Adobe; companies like these are cheap relative to their history, and we're getting them at a bargain. In the global industrials sector, we like Emerson, Amatech and Danaher. All look attractive from a price perspective. In consumer staples, we like Procter and Gamble. People are trading down to store brands for the most part, but brands like Palmolive and Colgate are so solid, they continue to do well.
We always like companies that generate excess cash. All of our companies have a history of paying dividends, which will be increasingly important to total returns over the next few years.
Brian Wright
Portfolio Manager
Advanced Equities Asset Management
Earlier in the year, and even late last year, we were in steel, industrials and oil services. They were cheap compared to a lot of the other cyclicals out there. We were overweighted in these sectors, and from the March low to the end of the second quarter they outperformed. But things have changed, and we've shifted towards technology, one of the strongest performers since November. They have better balance sheets now than they've had at any other time since the technology implosion earlier this decade. And many of the companies are increasing their exposure to Asia, an area where so much is happening in tech.
Overall, we have neutralized our positions within the portfolio since the end of the second quarter. We have no real overweights or underweights. We're waiting to see what the next leading sector is to break out.
Phil Foreman
Portfolio Manager
Principal Capital Appreciation Fund
We're finding alpha in four areas. Companies that benefit from the rising savings rate is the first. Obviously, the number of trusted financial institutions narrowed last year. Therefore, the trusted institutions that remain will benefit. But I'm talking strictly about the institutions that help clients save, not those that lend money; that's something completely different.
Also, we're again finding opportunities in emerging markets like China and India. But you have to watch out for China, because they want to be completely self-sufficient. So we look to companies that have proprietary products not easily copied, and that have a well-established sales footprint and solid results for the past four quarters, at least.
The controversy over the economy here at home is the third area in which we're finding alpha. Is the economy at a point where it will begin to grow, and if so, can that growth be sustained? The stimulus is designed to trickle up through the economy and we hope it works. The money is going to go to infrastructure, health care research and development, alternative energy and the smart grid. And businesses associated with those industries will benefit.
The last area - believe it or not - is the auto industry. It's controversial and out of favor. But we believe people are now holding on to cars longer and vehicles on average are getting older. Couple this with strong incentives to buy fuel-efficient cars (cash for clunkers), and it's an area of pent-up demand that should perform well going forward.
Michael Hasenstab
Portfolio Manager
Templeton Global Bond Fund
One of the biggest areas where we're finding alpha is in the currency markets outside the U.S., and those other than the yen, pound or euro. The policy responses in the U.S. prevented the collapse of the banking system, which we applaud. However, the printing and spending of money means that the dollar will lose its status as the world's only reserve currency. It will now share that status with other currencies. Indeed, we've already seen it happen with Brazilian exporters pricing in Chinese yuan because they're doing so much business over there. Countries are already shifting away from a currency system based on the dollar alone. As a result, we see demand for other currencies increasing. So for your readers and their clients, global bonds connected to currencies are an opportunity. They're non-correlated to other parts of the portfolio, so it's good for diversification.
We also see opportunity in the sovereign credit markets. They're positioned not so much for currency opportunity, but rather for their ability to repay their sovereign debt. A year ago, pre-Lehman Brothers, sovereign markets were priced to perfection. Emerging market countries were able to reduce their debt as a percentage of GDP, and they had a surplus of cash for a rainy day. Well, we think it's pretty obvious that the rainy day came, so we like the sovereign credit markets.
John Schonberg
Portfolio Manager
Ameriprise Mid-cap Growth Fund
Technology is exciting to us. By way of background, last fall everything fell due to liquidity concerns; every stock out there. But we decided it was a good time to look at the technology sector, specifically companies with good cash flows and little debt, companies with a good balance sheet overall. We found some that were ridiculously cheap, so we went heavy on tech at that time. We've since cut back, but one area fits with our secular themes. If they do voice, video or data over the Internet, we want to be in it. Companies like Akemi that handle really large bandwidth are companies we like. The emergence of video takes so much more bandwidth to run, and we're really only in the first or second inning of this. We heard so much for so long about downloading to your television rather than running out to Blockbuster. Well, we're finally at that point.
We also believe in the stimulus, so we're in industrials. The so-called smart grid is also part of the stimulus, so we like utility infrastructure companies like Hubble. We feel this sector will perform well in the next 12 to 15 months.
Brian Schaub
Co-Portfolio Manager
Janus Triton Fund
Our goal is to find small-cap companies that graduate to top mid-cap companies. This way we can capture a company's complete return potential, whereas other more traditional small-cap managers might have to sell. There are a number of large- and mid-cap companies that have declined in market-cap to where they are now small-cap companies. But we feel they overshot on the downside, and they'll eventually be large- and mid-cap companies again.
These are the companies we're looking for. But they must also have the following characteristics: differentiated products and services; a sustainable competitive advantage (meaning they must have a cost advantage, large enough scale or a corporate culture that encourages their competitive advantage); they must be in large, addressable markets in which they have the ability to grow (not necessarily the leaders of today, but rather the leaders of tomorrow); and the job of CFO should be an easy one, meaning they have predictable results and any surprises that have a negative impact on earnings are kept to a minimum.
We buy for the long-term. It helps instill a discipline that other managers only looking to the next quarter's results might not have. With this in mind, we're finding opportunity in the financial space. Not lending institutions, mind you, but financial technology companies; those that make financial companies more efficient. We really like it if they have a subscription-based business model. It's a predictable and recurring revenue stream. These kinds of companies got lumped in with the financial sector, but they're not traditional financial companies.
Jim Moffett
Portfolio Manager
UMB Scout International Fund and UMB Scout International Discovery Fund
In the short run, as we're bouncing off the bottom, emerging markets are once again doing well in the international arena. And they weren't ripped up in quite the same way they were during the Asian flu of 1997. In the long run, emerging markets will be 15 percent of our international investing portfolio. It's the high beta section and very volatile. We're mandated to be able to go as high as 20 percent, but we feel 15 percent is right. The other way to slice it (rather than areas of the globe) is by sectors. The technology sector offers opportunity, and what's more is that it overlaps with certain emerging markets, particularly Asia.
