Versatile mutual fund manger Margaret Patel, known for her skills managing both high-yield bond and equity portfolios, has lately been shuffling assets around more than usual. At the end of the third quarter of 2018, the Wells Fargo Diversified Capital Builder Fund, a multi-asset mutual fund Patel has managed for over a decade, had roughly 85% of its assets in stocks, 13% in bonds and 2% in cash equivalents. By the time Thanksgiving rolled around, that stock allocation had dropped nearly 15 percentage points to 70.4% of assets, while bonds had risen to 22.4% and cash to 7.2%.

Much of the change took place in October. As the stock market began teetering, Patel aggressively sold the fund’s substantial technology sector holdings, including Microsoft, Adobe and Google. “We had names with too much fluff, and it became apparent that technology would not be an outperforming sector in the next three to six months,” she says of the move. She also pared back energy holdings, concerned about a drop in oil prices.

Such a dramatic shift in such a short time frame is unusual for the fund, which has a modest portfolio turnover rate of 54%. But given the swift changes in the market as 2018 drew to a close, she felt decisive changes were necessary. When the stock market began to feel the weight of rising interest rates, she became convinced there was more risk afloat from Federal  Reserve policy than was apparent in the first half of the year. High-flying stocks in the tech industry fell swiftly, while rising oil prices gave rise to murmurs about inflation.

After selling tech and energy positions, Patel deployed most of the proceeds from those sales in more defensive sectors such as utilities and health care. She also added money to high-yield bonds and cash; by November, cash was at over 7%, an unusually high level for the Wells Fargo fund.

The fund’s more sedate tenor these days becomes apparent when Patel is asked to highlight holdings with good potential for growth. Among those she cites is defense contractor Lockheed Martin. “I like the defense industry,” she says. “It’s had a big correction, but there’s a demonstrated need for military hardware and good prospects for above-average long-term growth.” She also likes Atmos Energy Corp., a Texas natural gas distributor. The territory the company delivers gas to is growing, and Atmos is also benefiting from a more relaxed regulatory environment for natural gas distributors.

On the bond side of the portfolio, Patel recently purchased high-yield securities issued by Ball Corporation, a company that makes containers for beverages, personal care products, paint and household products. With a 4% coupon, the Ball bonds, which mature in 2023, offer a higher yield than cash equivalents and will either hold their value or appreciate.

Mid-Single-Digit Returns For 2019

Despite her recent maneuvers within her portfolio, Patel maintains a relatively optimistic outlook. Economic data remains supportive for continued growth, and while the current economic expansion has been long by historical standards, she thinks the slow, steady growth can continue and that the risk of a near-term recession remains low. She believes the Federal Reserve is likely to hold off rate increases if it becomes apparent that rising rates are putting a stress on economic growth.

High-yield bonds have accounted for most of the fixed-income portfolio in Patel’s fund during her tenure. She says these bonds still offer a decent yield advantage over Treasurys, that demand for them is strong, and that their default rates are low. Against this backdrop, she expects mid-single-digit returns for both stocks and high-yield bonds in 2019. “We expect high-yield bonds to basically earn their coupons in the 4% to 6% range, and for stocks to return somewhere around 5% to 8%,” she says. “So high-yield bonds are likely to do about as well as equity markets.”

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