Five Go-Anywhere Managers on Today's Opportunities

After a fierce rally off March 2009 lows, investors could reasonably conclude that opportunities are scarcer today. Need a wider net? We checked in with five notable "go-anywhere" managers--those with a freer rein to invest over the market-cap spectrum, around the world, within multiple bond sectors, or even across asset classes--to see how they're positioning their portfolios today, and where, in their bigger playing fields, they're finding the best ideas.

Get insights from:

• David Winters, Wintergreen (world stock): See Below
• David Decker, Janus Contrarian (large blend): Page 2
• Michael Avery and Ryan Caldwell, Ivy Asset Strategy (world allocation): Page 3
• Brian McMahon, Thornburg Investment Income Builder (world allocation): Page 4
• Art Steinmetz, Oppenheimer Strategic Income (multisector bond): Page 5

Skate to Where the Puck Is Going to Be
 Wintergreen's  David Winters on:

Opportunities Today
We clearly had a big rally, but there are some companies and businesses that are doing just fine, and their securities are still compelling. So we still think there's lots to do. It's not the bottom of a panic, but still, we're very constructive.

[We] own securities that aren't as well known or part of the index; they often have a tendency of lagging. For example, we own Jardine Matheson. But Jardine's still very cheap. The businesses are doing well. The part of the world they're operating in is doing great. And the stock's done fine, but it still could trade at a 40 or 50 percent discount of what it's worth.

Catalysts
Most investors are still in hiding. Even though we've had a big rally, you have a lot of people who, [based on] the mutual fund flows, ... are buying long-term bonds with low coupons. So I think confidence has to return, and I think, as these companies put up their results on the boards, people will notice. But sometimes it just takes time.

Bonds vs. Equities
People have a tendency of chasing yesterday's story, and I think that's what's going on with fixed income. Part of the reason that we've favored equities and favored really high-quality equities is because you can buy wonderful businesses today at very reasonable prices with really good management. That hasn't existed in most of our investment career. ... That's where we think investors should be focused, but they're really focused on low coupons where the risk is not only higher rates at some point but of inflation, which no one talks about.

U.S. vs. Foreign Investments
From a macro perspective, the U.S. is a mature economy with a lot of debt. When you look at what's going on outside the 50 states, that's where a lot of the real economic activity is right now and would appear to be in the future.

We're really focused on these non-U.S. companies that can capture those opportunities, or U.S. companies that have generally a lot of foreign exposure.

Wayne Gretzky, the Canadian hockey player, said, "Skate to where the puck's going to be," and we think the puck is definitely beyond the borders of the United States.

I think the Far East has got to be one of the most fertile parts of the world. There are lots of different ways to participate in it, not just through companies that are listed in the Far East.

We like Swiss companies like Richemont, that owns Cartier. That's really well positioned to capitalize on the greater wealth that's in the Far East, and then being created through ownership of brands like Cartier. We really think that's where the action is.

 

Dividend Bull Market
 Janus Contrarian's (JSVAX) David Decker on:

Valuations Today
It's always easy to reflect and say, "Oh, geez, how great the opportunity was in March of last year." � [But if you look] at what was one of the best risk/reward opportunities in the last 20 years as a measurement point for whether things are expensive or not [today] � you'll just sit there and say, "Well, I can't buy this because it's up 100%, 200%."

The reality is that you just have to forget that. You have to look at the individual situations and see if the risk/reward still exists.

The areas that we invested quite heavily, in the U.S. particularly, was on the financial side. Now, I still own a number of financials. Many of them are up substantially, but we believe that there is still a tremendous amount of upside, relative to the normalized earnings power, in an environment where credit is only "OK."

We have taken some money off the table, but are still finding, even today, good opportunities in financials.

Opportunities Overseas
It has become clear to me, increasingly clear, that there are significant opportunities in Asia, and from my perspective, particularly in India.

Within India, the power industry is one of my larger investments. It has tremendous economics and tremendously predictable growth over the next 15 years. And those two together make for a very exciting industry.

The other theme which I think is very significant in India--it's also significant in China and other Southeast Asian countries--is the fact that a few hundred million people have been brought out of poverty over the last 15 or 20 years. The consumption of those people continues to increase.

How [do] you play that? There are a lot of areas. You can look at the high end. We're actually looking more at the lower end, more basics. But consumption is a very, very powerful opportunity, I believe, and it also doesn't really depend on house prices in Las Vegas.

Opportunities in Dividend-Payers
One area that I've spent more time on is in the area of dividends. � As you look back over the last 10 years, where the market has essentially done nothing � people look at their accounts they say, "Well, geez, all I have is a memory of having a big portfolio. I never got anything back. There was never a return of capital."

I think there's going to be a shift back to realizing how important a consistent growing dividend is to a long-term investment portfolio. I think that we might see sort of a "dividend bull market" where the demand for the yield, compresses the yield.

There's a number of companies out there that have 7%, 8%, 10% yield, some even 5% and 6% yields. They're really high-quality companies, very good cash flows, very predictable cash flows. If it turns out that [investors] are over-emphasizing the risk on the dividend, you might have a 5%-6% dividend company, yet it really should be more like a 3%-4% dividend, based on its risk. That would cause a very substantial increase in price.

 

A Stock-Picker's Market
 Ivy Asset Strategy's (WASAX) Michael Avery and Ryan Caldwell on:

Opportunities Today
One of the significant themes we're anticipating in the months ahead is a transition from a liquidity-driven market to a "stock-picker's" market. For that reason, we are less concerned with where a company is domiciled--its geographical exposure--than we are in identifying the steady-growth companies that fit our criteria for sustainable competitive advantage.

We believe the way to succeed in 2010 is to spend less time on the macro view and more time on micro analysis and individual security selection. This plays very well into the investment theme that we've had in place for some time [about] the opportunities presented by the emerging middle class as the global economy rebalances. We have been and remain focused on China, with nearly a quarter of the fund's assets currently invested there, and which we think remains very attractive despite concerns about inflation.

We likely will continue to have a large concentration of the portfolio in equities, but we may begin to fine-tune the focus, placing additional emphasis on infrastructure. Industry sectors where we may make adjustments could include materials, energy, and industrials, given our belief that a large infrastructure build-out will occur in the western provinces of China, such as the Hunan Province, Sichuan Province, Shaanxi Province and provinces even further west.

We constantly are reminded that Chinese policymakers are focused on fiscal stimulus projects--monetary stimulus policies that are intended to take pressure off the Tier I cities and bring a higher level of prosperity to the western provinces. We'll focus on that more in 2010.

We'll also sharpen our focus on companies that are moving up the value chain and producing higher-quality products--particularly in the areas of heavy machinery, industrial equipment, textiles machines--and that have a targeted market of individuals outside of China, as well as other parts of Asia, the Middle East and the African continent.

In the meantime, we continue to like Chinese life insurance companies. The insurance industry is all about a play on consumption--life insurance is going to be used in the pension scheme in 2010 for Chinese citizens to be able to get tax deductions for investing in life insurance. Therefore, we see life insurance as a good 20-25% growth industry.

Bond vs. Equities
While fixed-income products have outperformed equities over the last decade, that is a pattern we do not believe is sustainable. � In our view, corporate bond spreads are tight and likely to grow tighter, and we think Treasuries are range bound.

Considering where profits are accruing in the profit cycle, we believe that it is more advantageous to be an equity holder right now. For those reasons, Ivy Asset Strategy Fund currently is about 80% invested in equities, with approximately another 15% of the fund's assets in gold bullion. The fixed-income position is now less than half of 1%, and our cash position represents the remainder--about 3-1/2% of the fund.

Holding Gold
Moving forward, we do anticipate we'll decrease gold as a percent of the portfolio. We think it continues to work as an asset class as long as policymakers globally are focused on either quantitative easing or other monetary policies that are designed to stimulate real output. Such efforts may, however, have the unintended consequence of devaluing fiat currencies. When that happens, gold as a hard-currency alternative often comes into play.

Clearly, the desirability of gold as an asset class is very well known and perhaps a little bit of a tiresome story for some investors. We suspect that now that everybody understands that story, the cachet associated with owning gold may begin to diminish sometime in 2010, perhaps in the second half.

 

The Engine of Growth for Income
 Thornburg Investment Income Builder's (TIBAX) Brian McMahon

The Quest for Yield
Through most of the 1990s and then most of this decade, somebody was able to get a pretty comfortable, real yield without really investing. And that, I think, is tougher for the time being.

Ben Bernanke has basically dared and double dared investors to invest and to take some risk, and he's pretty much promised that people aren't going to get paid for hanging on to the edge of the pool. I think that message did not get through very quickly, but it's beginning to get through now� So, there are various subcategories within bonds, and to the extent that people are just hell-bent to pursue yield, and damn the price risk, damn the yield curve risk, even damn the credit risk which is a stage we'll eventually get to. We always do.

I've been in the mutual fund business as a portfolio manager since the fall of 1984, so almost 25 and a half years. And a good portion of that period, I ran  Thornburg Limited Term Municipal Fund (LTMFX), which is a laddered-maturity bond fund. We tried to balance price risk and expected return. And we did it in a pretty low tech way, with an old fashioned, laddered maturity with an average maturity of less than five years. It's always worked. It still does work � and I can tell you, from 25 years of experience, that it is ignored by most investors. The commonsense approach is usually ignored. And the reason is you never have the highest yield.

Opportunities in Dividends
The engine for the growth of the [fund's] income almost necessarily has to be dividend growth from equities. I can sit here and comfortably tell you, over time, I'm going to want to have over half of our assets, well over half, in equities.

If you look at the major markets of the world, they were all down, dividend income, by 20% or more. And we're not going to get that back, even in 2010. We're not going to get that dividend income back quickly.

So, it's a real challenge, and you can't ignore that challenge. And I think you can't do stupid things in the face of that challenge. You have to adjust the game a little bit. Maybe it's like playing football on a frozen, muddy field with sleet coming down. You can't use your West Coast offense in conditions like that, because you're just going to make mistakes and get hurt�

So I think if you look at our allocation by sector, we're in the sectors that I think have had the most durable cash flows and equities, and that's been true for awhile, but telecom services is our biggest sector weighting. It's not a very glamorous sector. It's cheaper today than it was two years ago, for the most part, which I think is interesting. Dividend yields are equal to or greater than what they were two years ago, on average, around the globe.

Total return is nothing to write home about, but I think the money is pretty safe, because on average, your enterprise value to operating cash flow, or if you want to say EBITDA, is somewhere around five times, give or take half a multiple point.

I don't view that as being dangerously overvalued. These things tend to have dividend yields anywhere between 5 and maybe, on the high side, 8%. So we like that. We like parts of energy. I think the energy stocks are priced, broadly speaking, for lower oil prices than what we have.

Whether you look at them on a pure asset basis or a DCF basis, I think they look quite reasonable, probably can afford at least to maintain, if not increase, their dividends. And if the global economy takes off and global oil demand increases by 1 or 2 million barrels a day, from 83 or 84 to 85 or 86, then I think there will be some firmness on oil prices, so I feel OK about that.

Banks and financials are interesting, I think, if you look forward a couple of years, but it's going to be awhile before we get our dividends back in that sector. We're hunting and pecking there.

 

Most Bond Sectors Still 'Cheap' But Stick a Fork in Mortgages
 Oppenheimer Strategic Income's (OPSIX) Art Steinmetz on:

Bond Opportunities Today
It may seem strange to suggest that the best performing areas of the bond market still offer value, but we have to remember that the great returns of 2009 represent a snap back from the lousy returns of 2008. Investors should look at value today. In most sectors of the market we see bonds as still "cheap." That is to say, spreads are consistent with a very weak economy. Any economic improvement should continue to help corporate, municipal, and emerging-market bonds. We can expect more modest returns this year, but continued good performance is entirely consistent with the pattern of crash and recovery we saw over the last two years.

Bonds vs. Equities
Investors typically chase trailing returns. The money moving into bond funds was a symptom of fear, not a reasoned value judgment. Investors are right to be disillusioned about equity returns over the past decade, but we believe they were a function of a capital shift to foreign markets, which generally looked much better than the U.S. Going forward we see more of a normalization between equity returns in the U.S. and foreign markets and equity vs. bond returns. Investors should always look at the future when thinking about portfolio allocations. Such allocations should include both bonds and stocks, but the flow from stocks into bonds last year was probably excessive.

Interest Rates
The Fed will remain on hold for most of 2010. With that in mind, investors can take advantage of much higher interest rates at the longer end of the curve for another few months, at least. Longer term, investors have to scrutinize how much interest rate risk they should have in their portfolios.

One mitigating factor in many bond portfolios is exposure to factors beyond interest rate risk. Corporate bonds and municipal bonds, in particular, continue to trade at spread levels consistent with a slow economy. If we assume that a rising Fed Funds rate is a response to a robust economy, we can hope that wide spreads on bonds with credit risk will come down. This will offset or, at least, blunt the effects of rising Treasury yields. In 1994, the worst year in decades for Treasury debt, "junk" bonds were the best-performing sector of the bond market.

Overvalued/Risky Areas of the Bond Market
Treasuries obviously stick out but, again, this may not be a problem until later in the year. Mortgages: stick a fork in them. They're done. Mortgages enjoyed unprecedented performance in 2009, snapping back from 2008. But unlike corporate bonds, the value no longer exists in this sector. We find no yield advantage over Treasuries after adjusting for prepayment risk and look to move much of our mortgage exposure to corporate bonds.

International investing represents a special challenge. Once the Fed hikes rates, the dollar will see a boost, hurting many foreign currency-denominated assets. We are focusing on countries that will continue to have an interest rate advantage over the U.S. even after the Fed hike cycle is well under way. Many emerging markets look well positioned in this respect.

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