As stock market outlooks go, they don't get much rosier than that of Dale Harvey, manager of the Poplar Forest Partners Fund Ticker:(PFPFX).
“I'm a contrarian by thinking that right now, people are not optimistic enough,” he said. “I think the stock market could gain 20% this year.”
In the 15-month-old fund, Mr. Harvey is applying the same strategy he used for 16 years at Capital Research and Management Co., where he helped manage $20 billion under the
American Funds banner.
“It's an old-fashioned strategy of buying cheap and out-of-favor stocks,” said Mr. Harvey, who founded Poplar Forest Capital LLC in 2008.
“Two years ago [at the market bottom] was the most exciting time I ever had in 25 years of managing money,” he said. “There's not as much opportunity now as there was a year ago, but we're still looking at new investment ideas that have the potential to gain 25% a year over the next three years.”
The bottom-up stock-picking strategy starts with the basic premise that any new investment must show real potential to gain at least 15% annualized over the next three years, in addition to being more attractive than anything already in the fund.
The mission to hold only between 25 and 35 stocks requires that 85% of the positions are
dividend payers, have investment-grade balance sheets, and are mid-cap or larger.
The remaining 15% of the portfolio is defined by Mr. Harvey as “special situations with flexibility.”
While he is generally bullish on equities, particularly when compared with bonds, he has no interest in tracking the benchmark S&P 500.
For example, the fund has zero exposure to telecommunications, utilities, energy or materials sector stocks.
“I think people are more whipped up than they should be with regard to energy and commodities,” Mr. Harvey said. “It reminds me of the tech stock bubble in the late 1990s; I looked like a chump for a couple of years, but when the bubble burst, we had some positive returns.”
Where he does see opportunity, Mr. Harvey will go big, including a 20% allocation to financial sector stocks, including Axis Capital Holdings Ltd. Ticker:(AXS),
Bank of America Corp. Ticker:(BAC),
Citigroup Inc. Ticker:(C) and SEI Investments Co. Ticker:(SEIC).
“We think financials are one of the biggest underearning areas right now,” he said.
The technology sector is another 20% weighting in the fund, with names such as International Business Machines Corp. Ticker:(IBM), Microsoft Corp. Ticker:(MSFT), and Oracle Corp. Ticker:(ORCL).
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.
