The theme at American Beacon's 2nd annual investment forum was finding performance, value and growth in bonds, equities and emerging markets despite stormy weather, concerns about stagnant U.S. employment and the lingering European debt crisis.

"We've been more focused on the bond markets on a day-to-day basis because when the bond market is acting abnormally, it affects the stock market," said moderator and president of American Beacon Funds Gene Needles Jr. at Manhattan's Park Central Hotel on September 15. "How you manage credit, currency and curve will determine how successful you are as an investor."

The conference began with a bond panel consisting of Brandywine fund manager David Hoffman, American Beacon Short Term Bond Fund Manager Patrick Sporl and Strategic Income Management's High Yield Portfolio Manager Gary Pokrzywinski.

"Given the disruption that has occurred, opportunity is more prevalent now in high yield and is more reasonably priced. We're trying to get as much spread exposure to investment-grade corporate bonds, asset-backed securities and agency mortgage-backed securities as Treasuries become more expensive," said Sporl. Indeed, 10-year Treasuries have hovered near record-low yields as the term premium fell to negative 0.54 percent on September 6, 2011, indicating the notes are expensive when compared with the average 0.84 percent through mid-2007.  

In a counterintuitive move, Pokrzywinski is buying out-of-favor companies in the airline industry, the Las Vegas market, Western Europe and the Spanish industrial sector, as well as investing in convertibles, emerging-market securities, investment-grade securities, and preferred and dividend equities.

"It's a deflationary environment overall in the world. If rates rise, it would be because of a stronger economy, which would cause the spreads to tighten dramatically and prices to rise. That would be a good thing to happen at this point," said Pokrzywinski.

Prices dropping may not sound bad for consumers, but a persistent need to reduce can lead to declining prices for assets ranging from real estate to commodities. Those forces, in turn, could put pressure on corporate profits and stock prices.

"We've cut back duration in the U.S. because of deleveraging. We're seeing value in the short part of the high-yield market and looking to take more risk there. We're trading off government utilities," said Hoffman, Brandywine's Global Fixed Income Fund manager.

The consensus among fund managers on the domestic equity panel was that volatility is not a bad word. Speakers included Massachusetts Financial Services (MFS) portfolio manager Nevin Chitkara, Evercore Asset Management CIO Chris Fasciano, Pzena Investment Management CEO Richard Pzena and Dreman Value Fund Manager Mark Roach.

"Present current affairs and the uncertain economic environment are what create opportunity. You can only lose money if you sell a stock for less than what you bought it for," says Pzena, who cites Staples as a good value investment because the company is forging a 10% yield despite unemployment numbers. "By being long-term focused and investing in companies with a lot of cash flow we are avoiding the value trap."

The unemployment rate in the United States was last reported at 9.1 percent in August 2011. In the large-cap-value space, Chitkara cited Phillip Morris' dividend yield of more than 4% as a good investment.

"We focus on dividend yields but also on the free cash flow a business generates and durability of franchise to sustain that free cash flow over time. We are finding utilities to be less appealing because underlying valuations are higher, but health care is an industry where dividend yield and free cash flow are high," said Chitkara, a portfolio manager of the MFS's value, total return and global total return funds. Shares of the largest companies typically lose less than other stocks in market downturns. From the market peak of October 2007 through its low of March 2009 the S&P 100 lost 54 percent compared with the Russell 2000 Index's loss of 59 percent. But Roach anticipates future growth in the international market and claims that the most profitable small-cap stocks trade at a discount.

"About 70% of our stocks have meaningful exposure overseas," says Roach, who is responsible for managing all of Dreman's small-, mid- and smid-cap products.

As for international and emerging markets, managers are optimistic despite an overall atmosphere of fear, especially around Greece's debt crisis possibly causing a European collapse.

"Will Greece default? Yes, but it won't be as severe as the 2008 crisis. We are living in such an interconnected world that we fear Greece's demise will lead to a downturn," says Ruchir Sharma, managing director with Morgan Stanley Investment Management.   

The dire state of the public finances of Greece and other Eurozone members such as Portugal, Spain, Italy and Ireland have driven the Euro currency to a four-year low against the dollar and cast doubts over its future but emerging market and international fund managers see green.

"Europe is a big part of our benchmark. Since the euro currency bottomed in June 2010, it has appreciated 15%. We're looking for companies with low valuations, strong or improving financial productivity and companies with attractive trade-offs between valuations and returns," said Mike Bennett, managing director and portfolio manager with Lazard Asset Management, who referenced automaker BMW and pharmaceutical company Sanofi as good international stocks.

The recent tsunami hasn't stopped managers from scoping out Japan in their search for opportunity overseas. More than 350 people were killed in March 2011 after a tsunami caused by an 8.9-magnitude earthquake devastated northeast Japan. "The market overall in Japan is one of the better-performing developed countries because of the European debt crisis and the S&P downgrade of the U.S.," says Cliff Smith, who manages Boston Company's International Value Equity Fund.

Standard & Poor's downgraded the U.S. credit rating one notch in August 2011 for the first time, and markets have been more volatile ever since. "We think volatility presents great opportunity. We try to find countries that benefit from currency appreciation. We're not thinking about next year but the next three to five years, which mitigates volatility," says Chris Garrett, an institutional portfolio manager at Brandes Investment Partners who serves as a sub-advisor to the American Beacon Emerging Markets Fund. He added that the all-cap fund has up to 60 percent invested in large cap; 13 percent invested in developed markets, such as Hong Kong and Singapore; and 1 percent in Argentina as a frontier market position.

-Juliette Fairley