We feel strongly that in this slow economic growth environment, investors will be best served by focusing on those companies that are reinvesting in their business to drive organic growth.
—Chris Petrosino, managing director of the quantitative strategies, Manning & Napier
February 7, 2012
The various indicators we monitor were little changed since January with one noteworthy exception in the sentiment category. In late fall, sentiment measures were very depressed, falling into regimes that are indicative of a low-risk environment for equity investing and that generally signals a good buying opportunity. Since then, certain sentiment measures have improved modestly, causing the strong sentiment-based buy signal to fade. It is important to note, however, that investors are far from bullish today, as evidenced by continued outfl ows from equity mutual funds. Additionally, none of our economic indicators are pointing toward a high risk of a bear market in the near-term, and valuation indicators remain supportive of an overweight allocation to equities. Commensurately, our preference remains tilted toward equities versus fi xed income.
We feel strongly that in this slow economic growth environment, investors will be best served by focusing on those companies that are reinvesting in their business to drive organic growth. As a result, we continue to identify and pursue companies that we believe are well positioned for the long term and meet the requirements of our investment strategies and pricing disciplines. Amid a muted economic backdrop, we are focusing on high quality companies with sustainable competitive advantages that we believe can grow independently of overarching trends in the domestic economy and/or do not rely on government spending as a signifi cant source of revenue.
In the fi xed income space, we are fi nding the most compelling opportunities in “spread product” (i.e., securities that trade at a yield spread above U.S. Treasuries). In particular, our focus has been on the corporate sector. In our view, certain areas of the investment-grade corporate bond market are attractive, but we also continue to fi nd value in specifi c issues within the high yield space. With regard to Treasuries, we continue to prefer U.S. Agency (i.e., Fannie Mae, Freddie Mac, Ginnie Mae) mortgage-backed securities over Treasuries. On the tax-exempt side, municipal bonds have been receiving strong fl ows recently, and specifi c opportunities do exist, but here too investors should be selective in our view.