Wells Fargo's Ann Miletti: 'The days of 20% or 30% annual returns are not going to be possible'

The latest data showing unemployment now at its highest level in 26 years translates into a challenge for stock pickers over the next several years, according to Ann Miletti, who manages more than $2 billion for the Wells Fargo Funds Management Group. “The people running these companies are looking at tax increases and an uncertain regulatory and policy environment, and those are the things that give management pause,” she said. “We'll be looking for the kinds of companies that can grow through a tough environment, and the days of 20% or 30% annual returns are not going to be possible.” Ms. Miletti, who employs bottom-up research to find value in growth-at-a-reasonable-price strategy, starts by valuing companies on a private-market basis. “We consider things like competition, management and market cycles to determine what we would be willing to pay if we were buying the entire company,” she said. Once the private-market value is determined, Ms. Miletti expects a company to trade in the public markets within a certain range of the private-market value. During the widespread stock market sell-off beginning last fall, Ms. Miletti said a lot of company names came into her value range, and the portfolio of less than 80 stocks started leaning more toward growth. “Because it was cheap, we were buying more high-quality growth,” she said. “Even though we didn't know what the market would do, we wanted to be in companies we knew would survive.” Despite the strong rally since March, Ms. Miletti said the cloud of uncertainty has not lifted. “We've had a good third-quarter run, but it's been a lower-quality rally,” she said. “When the market appreciates as much as it has, people start looking for the market laggards.” One stock she believes is attractively valued as part of a larger cable and video industry theme is Time Warner Cable Inc. (TWC). “This is a company that is priced equal to a phone company, but it also has opportunities in the cable industry,” she said. Of the two mutual funds Ms. Miletti manages, the $1.2 billion Wells Fargo Advantage Common Stock Fund (STCSX) has gained 34% this year through Friday, and the $835 million Wells Fargo Advantage Opportunity Fund (SOPFX) is up 39%. This compares with a gain of 18.4% by the S&P 500 over the same period.