Bob Doll's 10 predictions for 2014 have led to the creation of a new unit trust.
The trust's makeup: 25 stocks based on the future outlook of Nuveen Asset Management's chief equity strategist and senior portfolio manager.
These themes include "potential economic, political and financial developments that may shape investment opportunities over the coming year," a Jan. 6 SEC filing states. Optimism points to "less fear and more confidence" in 2014, according to Doll. He also projects that the smaller market share of active equity managers and a broadening equity market will continue to push the bull market up.
More specifically, the Nuveen 2014 Equity Outlook (INNEOX) portfolio will be based on large-cap equity security picks from Doll's estimates for the economy and the market. It will be benchmarked against the Russell Investments' 1000 Index. The strategy will be run by Nuveen Asset Management and Incapital, an underwriter and distributor of securities, will assist.
"The launch of the UIT enables investors to directly access the Ten Predictions, for the first time," Doll says.
In July, Doll told Money Management Executive he rejoined the industry under Nuveen Asset Management to get back to stock picking and calling market predictions. He currently manages nine mutual funds in the large-cap core, growth, neutral and long/short strategies.
Q. Last year, you predicted a "muddle-through economy," where you were about 75% correct. What is in store for 2014?
We got 7 1/2 out of 10 right, largely because the theme last year, muddle through economy grinds higher equity market came true, so we got most of the predictions right. The theme this year we're far enough past the Great Recession, there are some themes in the economy that have looked a bit better. I think we'll look back on this year, on Dec. 31, [and say] people were a little less fearful and have a little more confidence. And in particular, corporations spent a little more money and have grown a little more strongly.
Q. In this year's first prediction, you claim that the U.S. economy will grow to by 3% because housing will pick up and private employment will hit an all-time high. What does this mean for mutual funds?
I think it means the economy does a little better so hopefully earnings do a little bit better, and hopefully that means that earnings that move stock prices and people that are investing can see that [and say], 'yes that is the stock that I own in that mutual fund that went up because earnings were improving.'
Q. According to Russell Investments indices, equity markets shot up the charts last year. What are some trends that you expect to continue in 2014?
I think the prediction that directly affects investors is the cyclical versus the defensive orientation that the economy does better, recognizing that cyclicals are cheap relative to defensive stocks. You have those mutual funds that lean in a cyclical direction will probably outperform from what I have done in my portfolio. I am overweight industrials, overweight technology, two cyclical sectors and underweight utilities, which would be a defensive sector. There being an implementation of that prediction.
Q. According to projections, Nuveen Asset Management expects companies with improving fundamentals will help to drive active equity performance. What are some stocks that you have been highlighting right now in your equity suite of nine mutual funds?
There are nine stocks that I have been highlighting which I own across my portfolios that are illustrative of the stuff we're talking about. Three industrial stocks, I happen to like aerospace/defense, so Boeing Co., Northrop Grumman and Raytheon. In technology, I call it cheap technology, Hewlett Packard, Co., Microsoft, Corp. and Oracle, Corp. And my favorite defensive sector is health care and the names we are using there are Medtronic Inc., Pfizer, Inc. and UnitedHealth Care.
Q. You proclaim that 2014 will be the year for active managers to bounce back and outperform the relative litany of equity index funds on the market. Why do you think this change is upon us?
The assumption or premise is that correlations continue to fall, that is stocks behave differently than one another than they have in the past, and as a result of that, the ability to discriminate from good ones and not so good ones comes a little easier. That's the reason active managers have begun to outperform that index funds and ETFs and I think that will continue.
Q. According to Morningstar, the equity market share points to active open-end mutual funds holding about a 65.22% as of Dec. 31, 2013. Index and ETF managers held about 18.26% and 16.52% during the same period. Do you think index funds and ETFs will lose their share in 2014?
I think that because ETFs are relatively new they will continue to gain share without question. New things tend to gain share and my contention is however that the average active manager will continue to beat them to the share.
Active fees and fund creation
However, what if placing well-researched bets like those offered by Doll do not do enough to keep equity clients attracted and funds in operation? New research from Cerulli Associates states that asset managers and other financial services firm have plans to invest more in products, distribution and technology in order to improve bottom lines.
"Growth of assets in low-cost, passively managed strategies, combined with ongoing pressure from investors and fund boards to justify fees in actively managed strategies, require firms to secure new revenue sources," says Cindy Erickson Zarker, director at Cerulli.
The average fees associated with active and passive strategies is staggering, however. Fees for the average active equity mutual fund included were the highest among the group, according to Morningstar. Net expense ratios were averaged at 1.370 for active funds, doubling passive funds and nearly tripling ETF funds.
Also, the number of active strategies has continued to beat out passive competitors. Approximately 104 new open-end mutual funds have been created by active managers like Doll, while only 39 ETFs and seven index strategies have surfaced since 2013's fourth quarter, Morningstar data shows.
"From a sales perspective, it is often easier to pitch a new fund that does not have the legacy of a poor track record," says Michael Rawson, a Morningstar fund analyst, while adding that "active funds prefer small size in order to exploit investment opportunities."