WASHINGTON—Stocks will return between 8% and 9% over the next three to five years, predicted Eddie C. Brown, president and CEO of Brown Capital Management, speaking on the “Industry Investments: Experience Talks” panel at the Investment Company Institute’s General Membership Meeting Thursday morning.

“Over the next three to five years, it will be a decent market as the economy continues to improve and because of the fundamentals,” Brown said. “We may not return to the mid-teens,” but equities will not disappoint as so many have predicted.

G. Staley Cates, president of Longleaf Partners Funds, echoed that sentiment, pointing out an average price/earnings ratio of 14 in the Standard & Poor’s 500 Index. He foresees returns of 6% to 7% in the near term. However, Cates pointed out many problems that the U.S. economy still faces. “The housing market is still nonexistent. Car sales are weak. Revenues for corporations aren’t there,” Cates said.

Jack Laporte, vice president at T. Rowe Price Associates, was more optimistic. “The strong cash flow of corporate America and companies’ balance sheet strength has never been better. Whether they use that money for higher dividend payouts, stock buybacks or mergers and acquisitions, that will boost stock performance,” Laporte said. “Companies aren’t hiring, however, and the country will continue to face high unemployment because we are now competing for jobs in a global labor market.”

Asked by moderator John Rogers, chairman and CEO of Ariel Investments, what attracted them to investment management and what criteria they look for in hiring portfolio managers, Laporte said he has always had a “longstanding interest in investing and a passion for finding small companies. As a value investor, I have always believed that to get the extra reward you need to take extra risk. We think people either have the quality to detect that or they don’t. When hiring talent, we ask them to give us examples of investments they have made, be it stocks or real estate, and to explain why they made it. And as to the whole contrarian thing, we have to see something in their life path that illustrates that.”

Brown, a growth investor, said he expanded on the original philosophy of GAAP, growth at any price, and coined GARP, growth at a reasonable price.  When hiring at Brown Capital, “We look for long-term thinkers, fundamentalists, and people who excel at research. They need to be able to look at a complete mosaic of economic, political and social factors surrounding a company, many of which are in conflict with one another, and analyze and make sense of it all. It is hard to find that kind of talent,” Brown said. “It’s a sixth sense that is hard to teach. Either a person has the ability to skillfully select stocks or they don’t.”

Cates said he always liked math and grew up watching his father, an entrepreneurial businessman, quantify his decisions. When hiring, he looks for individuals who are contrarians, who can remain dedicated to a long-term view even in the face of short-term “noise,” and who has the “right balance between confidence and humility so that they are able to put their ego aside and admit investment mistakes.” Cates said he doesn’t like to rely on benchmarks or style boxes but prefers to look at an individual’s long term record.

Rogers agreed that it is more important to look at an individual’s entire track record, including how many bull and bear markets it might have included, as well as their “character and quality.”

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