The best investment opportunities are likely to be found in defensive growth stocks, according to Jim Tierney, portfolio manager and analyst with W.P. Stewart & Co. Ltd.
Mr. Tierney, whose firm manages $1.6 billion, said that in this environment, his main focus is on “something cheap with a rising earnings stream.”
“When we look at the current market, there is no standout areas, and that's why we're tilting toward companies with consistent low-volume growth,” he said.
According to a breakdown of 2009 stock market performance by Morgan Stanley, the highest-rated companies gained an average of 15% last year, while the lowest-rated companies gained an average of 45%.
But as the market has rallied more than 60% off the March bottom and started to level off, Mr. Tierney is seeing more opportunities in the higher-quality companies.
“Last year's rally was a lower-quality rally,” he said. “The current environment is more of a stock picker's market.”
The W.P. Stewart strategy is about as straightforward as it gets. Every penny under management gets the same exposure to the same 15 or 20 stocks in a portfolio that averages 40% annual turnover.
Some of the firm's current holdings include MasterCard (MA), Google Inc. (GOOG), Becton Dickinson (BDX), Procter & Gamble Co. (PG) and Target Corp. (TGT).
“We do one thing here: high-quality-growth-stock investing,” Mr. Tierney said. “We're looking for great businesses with great management teams.”
The strategy is mostly managed through separate accounts but also can be tracked for smaller accounts through a mutual fund, the W.P. Stewart & Co. Growth Fund (WPSGX). Last year, the fund gained 32.5%, while the S&P 500 gained 26%. In 2008, the fund lost 31%, while the S&P 500 lost 38%.
The concentrated nature of the portfolio requires that companies have market capitalization levels of at least $3 billion.
Although the companies are primarily U.S.-based, about half the portfolio's total revenue and profits come from business operations outside the United States.
The strategy starts with a bottom-up research process, but the macro picture isn't ignored, Mr. Tierney said.
In the middle of 2008, for example, the portfolio took a conservative slant due to research suggesting storm clouds ahead. But by November of that year, when panic was settling in across the financial markets, Mr. Tierney and his team were already getting more aggressive.
“We're always going where we see opportunities,” he said. “We're looking for individual stories of good companies, but they have to be able to beat or meet earnings estimates.”
Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .