Lately, we've heard different opinions from various money managers about the economy's direction, and how it will affect stocks. But if we can agree that "cautious optimism" best describes the middle ground, then managers like Bill Gross are preaching caution, while those like Ken Fisher are comparatively more optimistic.
You may never have heard of John Osterweis, who studied philosophy at Bowdoin College in Maine before earning an MBA from Stanford. He's cautious but confident. Prior to founding the capital management firm that bears his name more than 25 years ago, he developed a knack for not losing his clients' money. And his sound faculties of logic and reasoning have helped his Osterweis Fund (OSTFX) achieve double-digit annualized returns over the past 15 years.
Until recently, Osterweis has been able to beat the S&P 500 by holding companies with infirm -- but improving -- balance sheets that have fallen out of favor with the markets. Now, he's more cautious in the face of what he sees as unprecedented economic challenges.
The Osterweis Fund
|
AUM |
$809.9 million |
|
Expense Ratio |
1.20% |
|
1-Year Return |
35.4% |
|
5-Year Average Annual Return |
3.4% |
|
10-Year Average Annual Return |
5.6% |
Source: Morningstar.
Top 5 holdings
|
Company |
% of Assets |
|---|---|
|
Bayer AG |
3.17% |
|
Agilent (NYSE:A) |
3.11% |
|
Verisign (NASDAQ:VRSN) |
3.10% |
|
Safeway |
2.95% |
|
Diageo (NYSE:DEO) |
2.87% |
Source: Morningstar.
When the market was stumbling last year, Osterweis was getting into short-term corporate bonds and reducing his fund's exposure to financial stocks. Consequently, he beat the S&P 500 by nearly 8% in 2008 and by over 9% during the first quarter of 2009.
Wanna hear the most annoying sound in the world?
But since the market rebounded, the fund hasn't quite kept up that pace. Nevertheless, Osterweis sees good providence in exercising caution. He maintains: "While the stock and bond markets have rallied sharply on near term signs of economic stabilization, the fundamental economic backdrop has not changed materially."
Osterweis is shifting his tried and true strategy somewhat. In the past, he focused on companies with weak financials, but now, he wants to emphasize mid-to-large sized companies with low debt levels that are capable of weathering prolonged economic headwinds. Specifically, he's going after companies that are well-positioned to gain market share from organizations that become insolvent or are otherwise driven out of the market.
Dividends are also a key factor for Osterweis. He owns dividend-paying utility stocks like San Diego-headquartered Sempra Energy (NYSE:SRE), Nevada-based NV Energy, and American Water Works. He's also heavily invested in health-care stocks, as he foresees diagnostics companies, pharmaceuticals, and rehab facilities benefiting from regulatory changes that will make health care available to more people. LabCorp (NYSE:LH), for instance, has a significant market share in the diagnostics space and thus stands to benefit from an aging population and increased demand for testing.
Still, Osterweis sees legitimate reasons to proceed with caution in everything from bare credit markets, deficit spending and eminent dollar devaluation, to an over-leveraged, under-employed consumer. In his recent equity outlook, Osterweis reports: "Both our financial system and the real economy remain critically dependent on broad based fiscal and monetary stimulus from the U.S. government."
We got no food, we got no jobs ...
The U.S. government, he observes, is "standing behind trillions of dollars of mortgages at Fannie Mae (NYSE:FNM), Freddie Mac (NYSE:FRE) and the [Federal Housing Administration] with unknown default risk" while running 12-figure deficits.
These issues provide the backdrop for what Osterweis sees in store for stock markets and the broader U.S. economy moving forward. Additionally, while inflation isn't a problem now, since money velocity is still low, as soon as recovery eventually takes hold -- and spending gains momentum -- inflation could present a legitimate risk. All of these factors, he says, could take a toll on stock market valuations. "Instead of moving into a prolonged bull market," Osterweis predicts, "stocks will gyrate up and down, reflecting the starts and stops of an economic recovery."
The seasoned manager plans to use this period of sideways movements to realize profits from short-term fluctuations, which is where having about 23% of the fund's assets in cash comes in handy. That kind of high-turnover strategy isn't what the fund's long-term investors are used to, but it seems consistent with Osterweis's philosophy right now -- and it's all in the name of preserving fund shareholder value in the years to come.
Who do you think belongs among the best portfolio managers of 2009? Share your opinions in the comments section below.
