By David Randall
NEW YORK (Reuters) - Top stock-picking fund managers won
2015 by aiming for brand name companies and avoiding the sector bets that
brought down biotech and energy investors.
Now, as they look ahead to 2016, these active investors
expect to be even more defensive, picking companies like Hersheys Co and
General Electric (N:GE) that they say will be able to weather the combination
of slow global growth and the first U.S. interest rate hike in a nearly decade.
"We're looking for companies that have some competitive
advantage that makes them the standard in their industry," said Dennis
Lynch, a co-portfolio manager of both the Morgan Stanley (N:MS) Institutional
Advantage fund and the Morgan Stanley Institutional Portfolio fund - the fifth
and sixth best performing large cap funds of this year with returns of 11.5
percent through Monday's close.
Lynch's Institutional Advantage fund, for instance, added
positions in consumer companies including Hershey, Estee Lauder Companies Inc
(N:EL) and Colgate-Palmolive Co in the quarter ending Sept. 30.
These types of consumer companies with strong brands tend to
withstand volatile markets, Lynch said. At the same time, he trimmed positions
in top holdings Amazon.com Inc (O:AMZN) and Facebook Inc (O:FB) that rallied
this year.
Other active fund managers that are looking for big names
with lots of downside protection in 2015 include Daniel Davidowitz,
co-portfolio manager of the $804 million Polen Growth fund - the year's top
performer in the large cap category - and Douglas Rao, portfolio manager of the
$2.4 billion Janus Forty fund.
"There's a lot of noise and volatility in the market
right now, and we're in the position of trying to find companies that are less
sensitive to the macro environment," said Rao.
Rao's fund gained 10.7 percent for the year through Monday,
a performance that was the 10th best among large-cap funds tracked by Lipper
during a time when only 24 percent of large-cap funds have been able to
outperform the 0.1 percent gain in the index this year, according to Lipper
data.
Much of Rao's performance came from his top holding, Google
(O:GOOGL) parent Alphabet Inc, which has gained 44 percent for the year to
date, and Amazon, which more than doubled this year and accounts for his
8th-largest position.
Yet Rao is not searching for the next stock to hit out the
lights in 2016. Instead, he expects GE to once again outperform in the coming
year as it sheds its GE Capital assets faster than analysts expect and turns
more of its focus to segments such as expanding its line of industrial
software.
"The fact is that we have an opportunity to build a
position in what we think will be a best of breed industrial company during a
period where the U.S. is going through an industrial recession," he said.
'WHEN THE SEAS GET ROUGH'
The Polen fund is aiming straight at all-weather stocks: All
20 companies in its portfolio generate high levels of cash flow, return 20
percent or more on capital and show increasing profit margins and organic
revenue growth.
Along with Facebook, Adobe was the only company Davidowitz
added this year to his portfolio, which bested all large-cap funds tracked by
Lipper with a gain of 13.4 percent through Monday. Much of that performance
came from top holding Nike Inc (N:NKE), which has gained 36.4 percent for the
year to date, along with large positions in Starbucks Corp (O:SBUX) - up 45.6
percent - and Visa Inc (N:V), up 17.7 percent.
"We aren't built to try to take advantage of rate hikes
or oil prices or anything like that," he said. "We want companies like
Adobe where it is hard for a competitor to pull their customers away."
That approach may be especially important in the year to
come. Since 1945, the benchmark S&P 500 has gained an average of 4.5
percent over the 12 months following the first rate hike of a business cycle,
or about half of the 8.8 percent average gain for the index among all years,
according to data from S&P Capital IQ.
"There's an old saying that when seas get rough sailors
prefer a larger boat, and we may have investors gravitating toward larger-cap
companies because they expect even rougher seas ahead," said Sam Stovall,
chief equity strategist at S&P Capital IQ.
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