That's led his fund to purchase companies with recurring, easy-to-see sources of revenue-the usual suspects are value plays such as consumer goods companies Diageo and Nestle, big box stores Walmart and Costco and famous value play Berkshire Hathaway.
Small Caps
It's an investor axiom that smaller, riskier companies with severely bludgeoned valuations are the ones that usually lead a market recovery, and that's been no less true in the past couple years, when small-cap stocks trounced their large compeers. In 2010, the S&P 600 small-cap index rose 26.31% while the large-cap S&P 500 rose only a squeak above 15%.
Though it might seem as if small-cap and mid-cap stocks have run their course, and that their valuations are getting too high, Quincy Krosby, an economist at Prudential Financial, says that perhaps there's still a reason to like them. As the economy continues to improve, she says, there will be more mergers and acquisition activity in this space, especially now that larger companies are sitting on record levels of balance sheet cash and will likely go on buying sprees for small fry. Small-cap and mid-cap stocks will be the prime targets of mergers and private equity buyouts, and these dynamics could further goose their company returns.
She stresses that even though small-cap valuations are high, these stocks should remain part of a balanced portfolio.
Paul Magnuson, a co-portfolio manager of the Allianz NFJ Small Cap Value Fund, a five-star fund at Morningstar, and one of Morningstar's nominees for stock manager of the year in 2010, says the increasing volatility of the stock market in the past decade has been one of the all-important considerations for stock performance, which is why his fund is concerned with those names that pay dividends.
"No matter what period you test ... dividend-paying stocks have considerably less volatility than non-dividend-paying stocks. We just think it's a better fishing pond, and in the current environment it's a much better fishing pond."
He says dividend-paying stocks also perform well in inflationary environments. "The reason is that in an inflationary environment, long-duration assets get hurt the most and people just want to get a portion of their total return sooner as opposed to later."
Mid Caps
Andrew C. Stephens is the portfolio manager of the Artisan Mid Cap Fund (ARTMX) and was another nominee for fund manager of the year by Morningstar. Stephens is a growth manager, and says that when there is growth in the economy with modest inflation, the environment has been positive for stocks. When inflation is moderate, price multiples generally go up.
"As growth investors, we think of our job as finding growth where it occurs," says Stephens. "Our preference is for that growth to be organic growth, meaning profit growth that is not dependent on a strong macro recovery.
"A year ago, we thought the case for owning organic growth in a moderate growth environment was very compelling," he continues. "Particularly those companies exposed to secular growth drivers such as mobile connectivity and industrial efficiency. We think these types of companies will continue to do well as we look forward, but we also think we're at a point in the economic cycle where there's some momentum to the recovery. As a result, we're a bit more comfortable increasing our exposure to cyclical growth."