Eight portfolio managers and their insights…..
Recently, I had the opportunity to meet, listen and ask questions of eight portfolio managers. Here are a few things I learned and who said it….
Tom Wetherald, Equity Portfolio Manager
Tom feels that with the US economy maturing, blue chip company earnings will grow more in line with the mature US economy than smaller companies. While this is not a new idea, it does give pause for thought.
Joe McDougall, Equity Portfolio Manager
Joe feels the free cash flow of companies favors equities over bonds over the long term. He used the example of a blue chip paying a 3.5% dividend as compared to a bond carrying a 2.9% coupon. He said that equities had delivered positive returns 98% of all ten year rolling periods going back 150 years. Of course don’t count the last ten years!
I asked a question about comparing performance of active management versus index or ETFs with lower costs. Joe made a good point that if returns are equal between the two, volatility is usually lower with active management.
Jim Swanson, Chief Investment Strategist
Jim feels that corporate health is very good because cash on balance sheets is at an all-time high and that the cash currently being produced is actually back to pre-2007 levels (that’s good). Jim highlighted that declining interest rates has allowed corporations to lower borrowing costs which increases profits.
As for consumers, Jim talked about US consumers spending increasing 2.2% over last year as compared to the decline of 1.8% during the recession. He reminded us that the housing mess has led to a peak in housing affordability as measured by the affordability index that takes into account interest rates, prices and earnings of consumers. That may have led to the stability in home prices recently seen in 16 out of 21 regions nationwide. As for automobiles, Jim tells us that the average auto is now 10.2 years old as compared to the historical average of 8.3 years. That is good news for future auto sales!
When asked why corporations aren’t hiring, Jim explained that hiring is approximately the 5th or 6th action that they take with accumulated cash. They have done the first four to a great extent already. For the record they usually upgrade technology next before hiring in any meaningful way.
Maura Shaughnessy, Utility Portfolio Manager
Maura stressed the opportunities that exist outside the US that has resulted in investments in companies in such countries as Spain and Portugal.
I asked her to explain the ramifications of not passing the “carbon tax” included in the failed energy bill. She indicated that the delay will cause further confusion for utilities on how to be more efficient and reduce costs of generating energy and will delay benefits to consumers.
Ward Brown, Fixed Income Portfolio Manager
Ward talked about the opportunities investing in emerging country’s debt. As a reminder, emerging countries are for instance, Brazil, Australia, Poland, India, China etc. He looked back 12 years and noted the 180 degree turn around of their balance sheets from that time when they welcomed foreign money but had structural deficits that led to high risk and eventual defaults. Not for the faint of heart but certainly food for thought.
Tom Melendez, International Portfolio Manager
One comment struck me. He indicated that in 2010, approximately 50% of the world’s GDP is produced outside the US. When considering allocations to companies with regards to their domain, he suggested we look at a cross section of global money managers to assess how much opportunity they feel lies outside our borders.
Eric Fischman, Growth Portfolio Manager
Eric made a lot of good points but my rain was beginning to fry but I did note one point: prices of equities are ultimately driven by earnings and earnings are driven by fundamentals. Eric described how valuable it is to be able to understand a company’s fundamentals by speaking to their management before making decisions whether to invest or not.
As the day ended, I realized how fast the world is changing and that there are no shortage of opinions on how to best profit from these changes.
These discussions do not constitute investment recommendations but instead are solely intended for educational purposes. Any information that might be used to make changes should be discussed with a professional to verify accuracy and relevance to your specific situation.
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