Fund manager not wildly bullish on 2012
Wednesday, December 21, 2011
DES MOINES, Iowa (AP) — Even in a volatile stock market there are opportunities to be found.
But Sam Peters of the Legg Mason Capital Management Value Trust fund calls the last few years "hell" for stock pickers. That's because so many stocks have moved up and down together in an "undifferentiated lump," making it more difficult to find great values.
It's a dynamic that makes it challenging for investors to find quality companies with shares that have dropped significantly for one reason or another, differentiating them from other stocks in the same industry. Knowing when to buy, when to sell, and when to hold those stocks is the bread and butter of active mutual fund managers.
Peters has co-managed the Value Trust fund (LMVTX) for a year. It has lost 6.5 percent in the last 12 months, compared with the Standard & Poor's 500, which is off 1 percent. In April he will become the sole manager when legendary manager Bill Miller moves on to other duties.
For the past few years stock correlations — where stocks in a range of industries move up and down in tandem — have been closer. Under normal market conditions they should move in more distinct patterns. It's often the case in uncertain economic times that spooked investors buy and sell stocks in herd-like fashion, which pushes correlations closer together. Some are saying the onslaught of electronic high-frequency trading and the increasing popularity of exchange-traded funds have created a new normal in which stocks may move more in concert than ever before.
Peters believes the market will return to a more normalized pattern but says he must be prepared to position the portfolio if stocks stay tightly synchronized. It's in that environment that Peters will take over a fund that currently oversees assets of about $2.7 billion. The fund held $20 billion in its heyday in 2007.
In a recent interview Peters discussed financial woes in Europe, our own government's debate over taxes and spending, and what he believes investors can expect next year.
Q: What's one thing you look for now in a stock you're considering?
A: When you have these cash-rich balance sheets and companies generating lots of cash, the "drunken sailor risk" is very high where these guys can just go out there and do stupid acquisitions. That's a huge risk for us.
To avoid things like that you look for companies where the management teams use the free cash to benefit investors more directly. We see how much goes to bets on the future via acquisitions and capital spending, and how much is going to owners today by paying dividends and share buybacks. We're looking for a balance.
Q: What are some of your concerns regarding Europe and how does that affect the market?
A: What worries me is that Europe infects China and Asia. Until recently there were huge expectations for the future as far as emerging growth goes. There could be a big downside if Europe slows down Asia.
I want to be positioned if Europe creates a global growth scare. I'm avoiding energy and materials, sectors that can get hit pretty hard.
Where I may get hit and take on water is where we're still very overweight — in financials, which don't do as poorly as energy and materials, but they get hit pretty hard. The dividend yield from some of our mega-cap holdings helps offsets financials quite a bit.
Ironically if we get this big global growth scare we'll do relatively well but it's not going to be fun for anybody. But on flip side, if we muddle through in the U.S. and we get accelerated housing I think we'll do OK.
If there is a big global growth scare, it will create a lot of valuation opportunities and we'll look to take advantage of those.
Q: What's your take on the ongoing debate about budget cuts versus increased taxes?
A: It's encouraging that we're having this debate. It is the fundamental debate between entitlements and the role of government versus increasing taxes to pay for services. I don't know how is going to be resolved. I'm actually encouraged by it because we need as a society to be settling this. It's going to be messy and there's not going to be one clear answer and it's going to have an impact on the standard of living for a lot of people. I don't want to dismiss that. But quite frankly there's a bunch of benefits out there we can't pay for at our current trajectory unless we choose to. If we choose to we've got to grow up and pay for the services.
Q: What's your view of 2012?
A: Everybody's saying we're going to see a lot of volatility and not go anywhere, so we're going to be in this continued tear your hair out and unsatisfying market. Since most people are saying that we're probably going to get something different.
I don't think earnings are going to collapse. I don't think we double dip back into recession. I think profit margins will hang in there and that will surprise people.
I think you do have to get some sort of fiscal union in Europe. I do think you'll see a bigger than anticipated slowdown in China and that's going to be the biggest headwind.
The thing that makes me most positive in the U.S. market is I think you'll see continued stabilization and actual improvement in the housing market, which will have a big multiplier effect on the economy.