March 3, 2003 — The media may be highlighting the likelihood of war in Iraq, but many fund managers believe this year’s main investment challenge will be securing gains from an improving U.S. economy.
Several portfolio managers predict a successful U.S.-led invasion of Iraq will spur investor confidence, but these professionals differ on how high stocks will go, and which investment style categories are likely to outperform.
“We’re bullish” about the market this year, said Quinn Stills, manager of Dreyfus Premier Strategic Value Fund/R (DRGVX). Stills sees signs of a rebound as companies build up cash reserves and pay down debt. Signaling his optimism, the manager says he’s bought stocks “that growth people had abandoned,” such as Nokia Corp ADS (NOK) and Nortel Networks (NT). While Stills expects these previous highfliers will gain, he’s cautious about some traditional value sectors, such as energy. So far this year, Dreyfus Premier Strategic Value was the second-best performing large-cap value fund, falling 0.2%.
“When the war is resolved, people will look for growth,” said Grant Sarris, manager of Waddell & Reed Advisors Small Cap Fund/A (UNSAX). Sarris sees a “sideways” market this year, but he’s “starting to add risk” to his portfolio. As the market rebounds, Sarris expects investors will initially favor blue-chip stocks, before moving into small-cap issues. Waddell & Reed Advisors Small Cap Fund was the fifth-best performing small-cap growth fund so far this year, gaining 0.4%.
“We’re hopeful for a turnaround in the second half of this year, but any liftoff will be weak,” said Gregory Macosko, manager of Lord Abbett Small Cap Value Fund/A (LRSCX). When a war in Iraq nears an end, Macosko predicts optimism will spur gains for growth stocks. Looking for safety, cautious investors will focus on large cap stocks, he forecasts. The manager is “hopeful” about an economic recovery in the second half of 2003, but “skeptical” about a strong rebound because of excess manufacturing capacity and a widening government deficit. Lord Abbett Small Cap Value was the fourth-best performing small cap value fund so far this year, dropping 2.3%.
“The economy needs time to rebuild because there are no engines to push it ahead,” said Mark Luftig, co-manager of Strong Dividend Income Fund (SDVIX). In the near term, Luftig expects that money will flow into conservative stocks. Based on this outlook, Strong Dividend Income is overweighting utility and energy stocks. Luftig believes energy stocks are selling at attractive valuations because investors are avoiding the sector until oil prices come down. A large-cap value offering, Strong Dividend Income has fallen 5.3% so far this year.
A bottom-up investor, Debbie Turner, co-manager of Mutual Shares Fund/Z (MUTHX), cautions that earnings estimates may be too high if we don’t get “a more than mild” recovery. In difficult environments, Turner feels investors can minimize downside risk by buying companies that are well positioned in their industries. Mutual Shares, which has a median market capitalization of $7 billion, has been buying declining stocks of companies in the utilities and telecom sectors that are restructuring. So far this year, Mutual Shares is the ninth-best performing mid-cap value fund, falling 2.4%.