NEW YORK - Let's just say they agree to disagree.
A septet of leading money managers from across the country recently gathered in midtown Manhattan to offer their perspectives on the state of the nation's capital markets, and their outlooks can all at once be characterized as bullish, bearish and anywhere in between.
Not surprisingly, however, the Lipper Leaders were unanimous in the notion that opportunities abound for their respective investment styles in the coming year.
The manager with the greatest reason to be enthusiastic might be Thomas Galvin of the Excelsior Funds in Boston. After years of smaller, value-like stocks outpacing their bigger, growth-oriented peers, the Russell 1000 Growth Index beat the Russell 1000 Value Index in each of the final three quarters of 2005, a development that hasn't occurred since 1999. So, this could be a breakout year for Galvin's Excelsior Large Cap Growth Fund, which against the wind has managed a return of 20.25% since its inception 34 months ago.
"It looks like it could be time for large-cap growth to reemerge. It's certainly been in hibernation for the last few years," Galvin said, adding that he expects corporate earnings to decelerate, which should lead to a narrowing within the market and an environment that further favors actively managed funds that are comprised of strong, organic growth companies.
Galvin's fund favors companies with earnings growth greater than 12%, a return on investment higher than 15% and three-year historical and future revenue of 10% or better. It limits its holdings to a modest 30 stocks, and international investment is held to 20% of the portfolio. It boasts $379 million under management.
Last year, it posted a 12% return against a 5% tally for its Russell 1000 benchmark. One key holding was Alcon, the nation's largest ophthalmology supplier. It grew in excess of 30% last year, and Galvin expects to squeeze another 20% to 25% out of it in 2006. Apple Computer, a stock Galvin has bought three times over the last 18 months, also had legs last year.
"For us it's always been about more than the iPod," Galvin remarked. "Is there a buzz around the iPod that creates a so-called halo effect and causes people to rethink buying Apple computers?"
That scenario seems to be playing out, as Apple's share of the Macintosh market was 1.5% two years ago and it stands at about 5% today. Mix in Apple's new retail stores, which add $1 billion in accessories sales annually, a new video iPod and an upcoming telephone iPod, and Apple's share of the Mac computer market will likely increase even further, Galvin said.
But while he's bullish on large-cap growth in 2006, Galvin thinks its popularity among investors will be a slow creep rather than a stampede.
"Nobody rang the bell in 1998 and 1999 to get into value, and I don't think anyone is ringing the bell now to get into growth," he said. "It will be a quiet emergence."
David Chalupnik of First American Funds, a $55 billion money manager in Minneapolis, said he's bullish on the equities market in 2006. Portfolio manager for the First American Mid-Cap Growth Opportunities Fund, Chalupnik thinks contained inflation, low long-term interest rates and an end to the Federal Reserve's rate hikes will drive valuations higher in 2006, perhaps close to a price-to-earnings ratio of 18, and create a recession-averse environment where mid-caps outperform large-caps.
"We are not looking for [a recession] in 2006," said Chalupnik, who manages $1.6 billion in assets across about 77 different stocks in the fund.
As one of the better-performing mid-cap funds - it's posted an annual return of 22.23% over the last three years, according to Lipper of New York - the fund is also uniquely positioned in 2006, as the shift away from small cap continues, he added. Chalupnik's assumption is that, as mid-cap stocks typically represent attractive companies with high-quality, established business models, excellent profitability and positive growth outlooks, they're in a sweet spot for burgeoning M&A activity.
Investors also have fewer alternatives these days.
"A lot of good small-cap funds out there are closed, so more investors are starting to migrate up the market cap realm," said Chalupnik, whose top holdings in 2005 included women's retailer Coldwater Creek, car audio manufacturer Harmon International and the jobs recruiter Monster.com.
Chalupnik's broad investment process combines quantitative and fundamental analyst research to focus on three key drivers of stock performance: business fundamentals, valuation and catalysts. But perhaps what make his fund and its parent firm most unique, is that everyone has skin in the game.
"Everyone has an incentive for our fund to outperform its peers and its benchmark," he said. "We are all aligned and working as one team."
Diane Sobin, portfolio manager for the $2.4 million Columbia Mid-Cap Value Fund at Columbia Management in New York, also thinks the market's growing M&A activity bodes well for her category.
"Mid-caps offer that critical mass to move the needle in mega-cap business models," said Sobin, who uses proprietary, fundamental research to identify companies with what she calls "positive operating inflection points," or those areas of a company's revenues, margins or returns that have been beaten down by either a temporary weakness in its business model, a turn in the market cycle, or an inaccurate asset valuation.
"We're not intrinsic value managers. We're looking for a specific change in the operating model" within a two-year time frame, she said.
Three of Sobin's stock selections from 2005 that typify that approach include Marshall & Ilsley, a commercial bank that is poised for relief from the recently flat yield curve; Harsco, an industrial engineering firm that is emerging from a cyclical trough as railroads and steel companies improve capital expenditures and the commercial construction market improves; and Williams Cos., an energy company that has begun repositioning its asset base to become more fully recognized by the market.
Not everyone, however, thinks 2006 will be all sunshine and roses.
Noted contrarian Barry James, manager of the James Small-Cap Fund at the James Advantage Funds in Dayton, Ohio, said that while spending out of Washington "should provide some stimulus, its effects will most likely be temporary and inefficient." James, whose fund has about $100 million under management, doesn't like the impact that higher tax levels and complicated regulations are having on U.S. corporations, and he thinks a deflating housing bubble is reason for concern.
"We have a lot of preconditions for a bear market," said James, who thinks opportunities could present themselves if a mid-year sell-off occurs. "It's going to be a difficult year for all stocks. Approaching it with a value orientation will be helpful."
Using in-house research, the James Small-Cap Fund focuses on the "what and when" of investing. In short, he looks for companies that are relatively inexpensive, generally with market caps between $50 million and $150 million, and those that have demonstrated earnings growth.
"You want a company that's making money," said James, whose fund has delivered a three-year return of 27.74%. "It's common sense. If you've got something that's cheap and it is outperforming the market, you can ride that for a long time."
Key holdings in 2005 included golf club manufacturer Aldila, which recently diversified into the industrial and aerospace markets; Vaalco Energy, a crude oil and natural gas developer with global exploration interests; and Park Electrochemical, which makes materials used in multilayer printed circuit boards and interconnection systems.
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