1. We look for high-quality companies with attractive valuations that are conservative and offer less risk, but where we can still find alpha. Valuations have compressed in high-quality companies almost to the same level as lower-quality companies. We've always been about high-quality companies but this environmentstill has allowed us to upgrade. Non-traditional areas in which we're finding alpha include technology; specifically companies like Oracle, Intel and Cisco. Many technology companies aren't old enough to have a solid track record, so it was tough to say they have good long-term prospects. But now, due to the maturation of certain companies and compressed valuations, they're much more attractive. More traditional sectors include consumer staples; we can always find attractive valuations there. But we haven't owned some of the better-known names until recently. For instance, we didn't own Proctor and Gamble until last year, when the valuations finally got to levels we felt were right. Overall, technology is our largest overweight, followed by consumer staples and business services. Accenture, for example, is a good example of what we hold in business services and again we like its compressed values and the way its matured. We're underweight in banking and have been for some time. We're quite cautious there. But other areas have been painted with the same banking brush, even though they're not bad off, and these represent good opportunities: State Street, for instance.
-- Kate Mead, institutional portfolio manager, MFS Vale Fund
2. We're value investors. In order to find the best value, you have to go right into the thick of the bad areas, such as consumer discretionary and financials. You demonstrate leadership to your investors by doing so. In value investing, the price is low because of the perception in the market, but then whatever fear subsides and prices rise. The problem is that we've been tag-teamed by two different market events: the mortgage crisis and energy. So they've kept valuations low. Right now we feel the U.S. markets are 25 percent below fair market value. Believe it or not, energy is not overvalued. We see a lot of bargains. Earnings have grown, value has grown, but price hasn't been able to keep pace.
-- Dr. Craig Callahan, founder and president, ICON Advisers
3. Where are we finding alpha? If we were facetious, I'd say we're finding it in our own home, since we're located in Alpha, Ohio. We keep harmony with the markets, recognizing the markets show results with about a six-month lag. We make money for clients by doing well in down markets. Right now we're closely watching our foreign trading partners. Inflation is declining and the dollar is gradually rising. Technology, industrials and machinery do well in export economies. Consumer staples and utilities will thrive. But we are definitely staying away from consumer discretionary and energy at the moment
-- Dr. Frank James, founder, chairman and CIO,
James Investment Research Inc.
4. In energy services we like Schlumberger Ltd. for their international and deep water drilling exposure. They've had good reporting. Financials is a place we're finding alpha, especially those companies that largely avoided the problems that have plagued the industry; for instance, State Street Bank, Goldman Sachs and Franklin Resources. These companies don't have a lot of lending exposure. They're more in asset management, so they've done better. In technology, Google has been very volatile recently, but a good name to own right now. They have 60 percent of the search business. There's been a lot of consternation about making advertising work on YouTube, but even so, we like them. In manufacturing, we like Danaher Corp., which we've owned for over a decade. Overall our investment philosophy is to look for companies with free cash-flow growth and durable, sustainable earnings.
-- Larry Puglia, portfolio manger, T. Rowe Price Blue Chip Growth Fund
5. We really like agriculture. Food shortages are driving valuations in agriculture related companies. You just can't magically increase food supplies. It takes time. And there isn't a lot of room left to grow more food, especially in the third world. Even in developing nations like China, they have major pollution problems. So companies that increase yields on existing crops will be the companies that prosper in the future. By this I mean fertilizer companies, as well as crop protection companies like those that produce pesticides and herbicides. We also like real estate, especially in countries like Japan and Brazil. Prices and rents in Tokyo are at a level that make them attractive.
-- Laurent Saltiel, lead portfolio manager of Janus Adviser International Forty Fund and co-portfolio manager of Janus Adviser International Equity Fund
6. Where are we finding alpha? It's as relevant a question as you can ask. We are looking across all equity classes in which we invest. Specifically, we're looking at the corporate loan market, especially in the past six to nine months. The pressures in the market make it very attractive. One theme I should note is that rather than taking a broad position in any one sector, we instead leverage the expertise in our own research department, particularly in high-yield bonds. They experienced a correction and widening of the credit spread that's led to more opportunity. Tenet Healthcare Corp. is an example of a holding whose high-yield credit bonds have done very well. It has real underlying asset value. In energy, we like Dynegy, an independent energy producer. We also like utility equities. They have very attractive yields, but also show dividend growth over time. Again, we don't have a broad exposure, but rely heavily on our research team. They help identify geographical areas that are experiencing growth in utilities, have a good regulatory environment and have population growth. It's these areas that we are looking at. Also, corporate credit has seen its spreads widen. Its been good for the dividend environment and good for the income fund. Shorter term maturities have performed well. We've taken profits from them and redeployed to some longer maturity bonds, but ones that have great yields.
-- Edward Perks, portfolio manager, Franklin Income Fund
7. Things have changed in the municipal bond market over the past year. The yield curve has steepened. A year ago the yield curve was flat and there was not much difference in yield between a 10- or 25-year bond. Now that the curve has steepened, 20- to 25-year maturities are more attractive because they're once again yielding more. Lower quality A and BBB bonds have underperformed and spreads are wider than we've seen. Bond insurers have had trouble and not done well. We don't have to pay for that insurance so that helps. A flight to quality has helped munies when compared to treasuries. It's had a positive impact for us. They both have the same yield, but one is taxed and the other isn't. And if tax rates go up, it adds to the attractiveness of munies.
-- Dan Solender, director of municipal bond management, Lord Abbett