In a wide-open pursuit of investment yield, stocks are trumping bonds, according to Mark Freeman, manager of the WHG Income Opportunity Fund Ticker:(WHGIX).
Mr. Freeman, who manages a total of $400 million, including $200 million in the fund, is moving against the grain of the investing masses by adding stocks and reducing his exposure to bonds.
His strategy involves investing across eight assets classes and anywhere in the capital structure, but the one requirement is the presence of income.
With that in mind, over the past year, Mr. Freeman has increased the portfolio’s allocation to stocks to around 35% from about 22%.
Over the same period, he trimmed the fixed-income weighting from 40% to below 30%.
“The fundamentals make a strong case for equities, but right now is a highly uncertain environment,” he said. “The most uncertain area is equities, and that’s what makes the opportunities.”
As illustrated by the more than $200 billion worth of net inflows into fixed-income mutual funds this year, and $18 billion worth of net outflows from equity funds, much of the investing public is still not willing to take on anything that looks like more risk.
“People are seeking out certainty, but you can take that too far,” Mr. Freeman said.
He pointed to the Nov. 2 midterm elections and the Nov. 3 meeting of the Federal Reserve’s monetary policy arm, which will focus on a quantitative easing policy, as examples of near-term uncertainty.
“Our feeling here is that if you’re not uncomfortable, you’re probably doing something wrong,” he said.
But comfort is a relative concept for a strategy that banks on the role of income as part of total return.
The portfolio of about 60 positions can include any mix of stocks, bonds, convertibles, preferred, royalty trusts, real estate investment trusts, master limited partnerships and cash.
“What drives the research process is attractive opportunities, and the only requirement is an income component,” Mr. Freeman said. “But there is no minimum to that income component, and that leads to fairly high quality securities.”
Johnson & Johnson Ticker:(JNJ) is one example of how equities are outstripping bonds on the income side. At more than $63 a share, the stock is yielding a 3.4%
dividend, while the 10-year bond is yielding 3%.
“There are large-cap equities that are trading with
dividend yields higher than their bonds,” Mr. Freeman said.
The cash now sitting on corporate balance sheets sets the stage for more income benefits to equity investors, he said.
“Cash on the balance sheet is a good problem to have,” Mr. Freeman said. “There’s a clear message from investors that they want money returned to shareholders.”
That money typically gets returned in three ways: dividends, stock buybacks or acquisitions.
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.
