Portfolio Manager Perspectives

Jeff Benjamin

The new frugality will boost consumer staple stocks, says Wasatch's Shive

Keen to reduce debt, many consumers will steer clear of luxury items

Mar 8, 2010 @ 3:21 pm

By Jeff Benjamin

The upside of nearly two decades of mounting levels of government and consumer debt is a solid foundation for a secular run by consumer staple companies, according to Ralph Shive, manager of the $1.5 billion Wasatch-1st Source Income Equity Fund Ticker:(FMIEX).

“When people are dealing with flat- to negative-disposable income, they buy fewer frivolous things and they start taking care of the necessities,” said Mr. Shive, who has managed the fund for 20 years for Wasatch Advisors Inc.

“I expect consumer spending to be muted for some time, due to high unemployment, increasing taxes, retiring boomers, and [the] consumer psyche,” he said.

Thus, he believes companies that are dependent on discretionary consumer spending will be “swimming upstream, while consumer staples will remain the primary focus of consumer expenditures.”

The consumer staples theme is followed and supported by opportunities he sees in both technology and select financial sector stocks.

But much of Mr. Shive's current economic outlook with regard to consumer staples can be traced to the 17-year stretch from 1991 through 2008 that saw virtually no pull-back in consumer debt and consumption levels.

“That was a consumer cycle like we've never seen, because there was never a retrenchment in terms of consumer debt,” he said. “Historically, we usually have some kind of recession every four or five years, and during those recessions the U.S. consumer debt would retrench, and then you can start the next bull market with pent-up demand.”

Traditionally, consumer spending represents 70% of the economy. Thus, a pullback in leads to slower growth.

But through three dramatic economic slowdowns in 1994, 1998, and 2001-2002, Mr. Shive said government policies and “financial liberalization” combined to “make things more affordable to consumers.”

While he doesn't let consumers off the hook for playing their part by not having the discipline to stop borrowing, he said consumers have recently started changing their spending habits.

“That retrenchment is happening now,” he said. “I think the U.S. consumer got the message.”

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.

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