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By Matthew Coffina, CFA | 01-29-2015 04:00 PM

Coffina: Expect Less From Stocks

Starting from current valuations, stocks simply aren't capable of delivering double-digit annualized total returns, says Morningstar's Matt Coffina.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Last year was another good one for stocks. I'm here with Matt Coffina--he's the editor of Morningstar StockInvestor newsletter--to see how his portfolios did versus the broader market and his outlook for 2015. Matt, thanks for joining me.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: Let's start by looking at the numbers. For the Tortoise and Hare portfolios that you manage, what did that performance look like versus the S&P 500?

Coffina: We had a good year. Both the Tortoise, which is our more conservative portfolio, and the Hare, which is our more aggressive picks, outperformed the S&P 500--the Tortoise by a slightly wider margin than the Hare. And on a combined basis, our portfolios were up 19.1% in 2014 versus the S&P 500, which was up 13.7%. So, we outperformed by 540 basis points. And that was actually our best year of relative performance since 2008. It's generally somewhat more difficult for our portfolios, which tend to be more conservatively oriented. It tends to be somewhat more difficult to outperform in what is a good year for stocks, like we had last year; but we had a pretty good year overall.

Glaser: Let's look at some of the factors that led to that outperformance. What holdings do you have that really contributed to that the most?

Coffina: There were a few themes that I would point to. Definitely, the decline in long-term interest rates helped us, especially in our Tortoise portfolio. So, some of the top-performing sectors last year were real estate, utilities, health care--generally more defensive, somewhat higher-yielding sectors. We had some exposure here, especially in the Tortoise, with companies like ITC Holdings (ITC) and HCP (HPC), which is a health-care REIT. And those stocks generally outperformed.

We also had a lot of repeat winners--stocks that did very well in 2013 that carried over to 2014. Often for similar reasons, but there aren't necessarily any broader themes that I can point to. It's really company-specific factors at work. So, for example, Energy Transfer Equity (ETE) continued to accelerate its distribution growth, continue to find new capital investment projects. General Dynamics (GD) continued to manage very well through the the defense-spending headwinds that they are facing. They continue to grow earnings; their backlog was very healthy.

Another name that did very well for us would be Lowe's (LOW). That actually fits in another category, which is retailers. All of our retailers did very well. Lowe's was a big winner as the housing recovery continued; the company continued to expand margins. We also did well with PetSmart (PETM), a stock that we bought. Really, our timing was lucky here because a month after we bought it, there was some involvement from an activist investor, and before the year was out, the company ended up agreeing to sell itself to some private equity firms. And I would say that was probably the biggest theme of all. We had a lot of one-off situations. There were a few themes that we could point to, but also a lot of company-specific factors that drove the outperformance. And that's really what you want to see, because I think it means that you are taking a diversified approach and your picks are working out for a variety of reasons.

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