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Recovery Anemic, Bumpy--but Still Proceeding

Though jobs and credit continue to be scarce, we are still on the path of a slow recovery, say Osterweis managers Carl Kaufman and Matthew Berler.

Esther Pak, assistant site editor, 07/08/2011

Carl Kaufman and Matthew Berler are portfolio managers of Osterweis Strategic Investment OSTVX, a balanced fund that can hold as little as 25% to as much as 75% in stocks with the balance in fixed income. 

They recently answered our questions about their current stance on the state of the economic recovery, where on the market-capitalization spectrum they were finding the most opportunities, and areas of the market where they were seeing limited downside and substantial upside potential. They also commented on investor fears over credit risk versus interest-rate risk and discussed the role the fund could play in an investor's portfolio.

1. This fund's allocations to stocks and bonds can vary widely. For whom would such an investment be most appropriate, and how would such a fund be best used in a portfolio? Is it designed to be a stand-alone offering or held as part of a broad portfolio alongside dedicated stock and bond holdings?
That is a question we get asked all the time. We think that Osterweis Strategic Investment can play a role in most portfolios. The fund pairs our core equity and fixed-income strategies in a format that allows us to strategically move the allocation heavier to stocks or bonds based on our macro outlook as well as the relative attractiveness of individual securities.

We think we can add value in the fund in three different ways: individual security selection, sector weightings, and risk avoidance within both the equity and fixed-income portfolios by tilting the broader portfolio toward either equities or fixed income at the appropriate parts of the cycle.

For investors looking for a single one-stop investment, Osterweis Strategic Investment might be a good fit. We would like to think that investors could invest their long-term retirement, college-savings dollars, and so on into the fund and have confidence that the fund has the potential to provide attractive absolute returns during a full market cycle. Many investors don't have the time or inclination to rebalance their portfolios, and we can take care of that for them.

Looking at the fund a different way, it is a great option for investors looking for an absolute-return-oriented satellite holding to complement other core positions. Although some investors might look at the fund as a traditional, statically positioned balanced fund, by adding the flexibility to shift the assets between equities and fixed income, we think we can add value to the portfolio. Additionally, we can also dynamically rotate between investment-grade and below-investment-grade fixed-income investments allowing us to play both offense and defense with these investments depending on whether we feel risks are economic- or interest-rate-based.

2. As of your most recently available portfolio, which featured upward of 65% of stocks, you appeared to be expecting a slow but steady economic recovery. Have recent economic data changed your viewpoint? Why or why not?
Since the start of the recovery, we have said that it would be anemic and subject to bumps along the way. During the second quarter, the road to recovery seemed to be littered with short-term bumps, including a barrage of bad weather in the United States and supply chain disruptions from the Japan earthquake and tsunami, resulting in a manufacturing slowdown. Additionally, rising gas prices have put pressure on consumer spending. The good news is that we see these as temporary factors, and we expect to see higher growth rates in the second half of the year.

Corporations continue to do well. Many are enjoying higher profits as a result of aggressive cost-cutting. They also have greatly improved their balance sheets. This suggests that even with a modest pace of economic expansion, corporations could generally do well, potentially enjoying strong profits and generating unusual amounts of free cash flow. Some of this cash might find its way into increased capital investment, debt repayment, higher dividends, share repurchases, and greater merger and acquisition activity. Additionally, with U.S. companies' increased exposure to emerging markets, we believe many companies should benefit from growth outside of the U.S.

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