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Jeff Saut: What I'm Hearing from Top Portfolio Managers Now (Part Two)


More reports from my past three weeks of meetings in NYC and Boston.

Return with us now to those thrilling days of yesteryear. A fiery horse with the speed of light, a cloud of dust, and a hearty "Hi-Ho Silver"...the Lone Ranger rides again! The era was the early 1980s when I was roaming the halls of Fidelity at 82 Devonshire Street in Boston. It was a heady time when the bull markets had just begun and investment ideas fell from the lips of portfolio managers (PMs) like raindrops on a steel roof in a Florida rain storm. The icons of the day were Peter Lynch, George Vanderheiden, Beth Terrana, Paul Stuka, and George Nobel, to name just a few. Back then, Fidelity's analysts were not allowed to have a quote machine on their desks, for fear they would watch the market rather than study annual reports. Consequently, there was a quote machine in the corner of every hallway with the analysts' favorite stocks keyed into the watch buffer. I remember that I used to take a close-up picture of those watch buffers and then do research on the stocks captured in said picture, but I digress. One of the unsung heroes of the time was a PM named Bruce Johnstone, whose fund, while not as well-known as Peter's Magellan Fund (FMAGX/$90.98), had an excellent track record combined with a great dividend yield. The fund was called Fidelity Equity Income Fund (FEQIX/$57.70). Bruce used to carry a small chart book around when he traveled to look at the stock charts and see if what he was deducing on a fundamental basis was consistent with the price action of the stocks. Somewhere in recent history, while not under Bruce's watch, the fund lost its way and James Morrow was brought in to manage the fund in 2011, after serving as a research analyst and portfolio manager at Fidelity since 1999.

Last Monday, I spent a few hours at Fidelity with various PMs, one of which was James Morrow. He was tapped to manage the fund because it had lost its cachet by trying to own all large capitalization dividend-paying/value stocks. Jim refocused the fund based on the intrinsic value methodologies of Warren Buffett. Accordingly, the fund consists of higher quality names than before as he looks for companies with higher ROEs and ROAs. Jim also believes in the persistency of dividends, a theme that certainly resonates with me. We discussed a few individual ideas, including M&T Bank (NYSE:MTB), which is geographically positioned to gain from the energy boom occurring within its region. In talking about out-of-favor groups that could benefit from a tax loss selling bounce in the new year, coal stocks became a topic. While Jim owns a number of coal stocks, the only one favorably rated by our fundamental analysts is Consol Energy (NYSE:CNX). Energy names he mentioned include Suncor (NYSE:SU) and Williams Company (NYSE:WMB).

Later in the week, I met with another equity income PM at Pioneer Funds. His name is Marco Pirondini, and I have talked with him a few times before. Marco is the team leader for the Pioneer Multi-Asset Income Fund (PMAIX/$11.57), a fund that can only be 50% maximum in stocks with a maximum of 60% of those stocks being US. The fund is non-benchmark constrained, giving Marco the ability to go anywhere and do just about anything. He sometimes uses derivative overlays to dampen volatility without adding risk to the fund. As a proof statement, he showed me where the fund has a ~160% "upside capture" with only an 84% "downside capture" rate. Like me, Marco doesn't like the US telecommunication and utility sectors, but he does favor the international telecom space. He told me the global telecom sector has been the best-performing sector over the past 60 days. He also has no REITs in the fund. After discussing his investment style, we centered on a few names. Marco really likes the healthcare space and mentioned Johnson & Johnson (NYSE:JNJ), while noting that at this time next year, it should have a 9% free cash flow yield. We also talked about Cardinal Health (NYSE:CAH), which should be a beneficiary of more access to drugs from Obamacare.

As always, my meeting with Putnam's David Glancy was chock full of stock ideas; I have owned David's Putnam Capital Spectrum Fund (PVSAX/$41.46) for years. David is currently 75% invested in equities and holds 25% in cash. His short sales are minimal, and there has not been much of a change in his portfolio since our last meeting. David mentioned a number of stocks that he likes; unfortunately some of them are rated Market Perform by our fundamental analysts, or are not covered by our analysts. One name he mentioned that is "cheap" in his opinion is UnitedHealth Group (NYSE:UNH). While at Putnam, I also met with Nick Thakore, captain of the Putnam Voyager Fund (PVOYX/$30.78), which invests mainly in common stocks of midsize and large US companies with a focus on growth stocks. Nick stated that the equity markets generally do not make a top when the stadium is only half full, and I agree! He believes he can generate performance without the help of the overall rise in the equity markets. He did add that he thinks the equity markets are going to do okay. Coincidentally, one of Nick's favorite stocks is the same as that of my friend of the Lord Abbett Growth Leaders Fund, Tom O'Halloran (LGLFX/$21.08), and that name is Facebook (NASDAQ:FB). Nick thinks that FB can increase its $1.50 "take" per customer to $5.00 per customer, as well as customize the advertising space.

So over the past three weeks, I have met with many PMs in NYC and Boston. In response to the ubiquitous question I am getting from financial advisors as to what to do with their fixed-income allocations in the upcoming rising interest rate environment, I have this to say: I think you need to be exceedingly careful in the years ahead with regard to fixed income. While in NYC, I met with Chris Towel, who manages the Lord Abbett Bond Debenture Fund (LBNDX/$8.14) and thinks the credit cycle is in very good shape. Chris has done a good job of side-stepping the backup in interest rates by using his organization's excellent fundamental equity research. He also told me there is only $85 billion of high yield debt maturing in 2014, so that market ought to continue to be okay. I also met with Ron Arons, along with Michael Swell, managers of the Goldman Sachs Strategic Income Fund (GSZAX/$10.61), which has short duration and is unconstrained in its approach. Bill Kohli, manager of the Putnam Diversified Income Trust (PDINX/$7.88), was on my list last week. Bill noted most bond fund managers will be slow to change their tactics after being lulled by the 30-year bull markets in bonds. He suggested most PMs would continue to have two to six years of duration rather than the negative duration in his fund. Lastly, I spoke with Ken Taubes, who runs the Pioneer Strategic Income Fund (PSRAX/$10.83). Ken said that his biggest fear is the economy heats up and the Fed responds with higher interest rates. He also mentioned the government will not be a drag on the economy in 2014 like it was in 2013. I found that very interesting. As always, the details of these funds should be checked, but I offer them for your consideration.

Of course I met with numerous other PMs, and I will be highlighting these discussions over the next few weeks. One final meeting I do wish to highlight was with David Ellison, manager of the Hennessey Financial Funds (HLFNX/$19.87 and HSFNX/$25.21). I have written extensively about David in the past, so due to space constraints I will not do so again. David did say his portfolios have not changed all that much since we last spoke. He did mention he thinks eventually the mega banks will break themselves up because it is the only way they can unlock their value. He believes Citigroup (NYSE:C) will be the first to spin something off.

The call for this week: As for the equity markets, there is not much to say. While once again I had looked for more of a pullback between mid-November and mid-December, I never wavered about it being difficult to put stocks away to the downside during the ebullient month of December. Meanwhile, most of my indicators are set up for another upside move. In fact, the only negatives I see are that the NY Composite (NYA/10196.08) failed to make a new high, the operating company Advance/Decline failed to do the same, the new lows list is expanding, and while the S&P 500 (INDEXSP:.INX) made new highs, less than 70% of its components are above their respective 50-day moving averages. So, this week should be consistent with an extension of the typical Santa rally.

(See also: Jeff Saut: What I'm Hearing From Top Portfolio Managers)
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