"When we look at the market, we see it's going to be a difficult year." So says mutual fund manager Barry James, and such seems to be the general consensus among mutual fund managers gathered together on Feb. 14. James, the manager of the James Small Cap Fund, went on to say, at a press briefing with seven managers of Lipper Leaders mutual funds, that there are "preconditions for a bear market." There's less agreement that a recession is imminent, but at the very least, with the end of the interest rate cycle and widely-predict economic slowdown, fund managers will be operating in a different environment this year.
Tom Galvin, who manages the Excelsior Large Cap Growth Fund, argues that, with sentiment remaining negative and a slowdown in corporate profit growth, "It could be time for large-cap growth to make a reemergence."
Likening the last 10 years to the "Nifty Fifty" period of the late '60s and early '70s, Galvin says it took five years to recover from the downturn in 1972. Of course, if the pattern holds, that means 2006, after what Galvin calls "two years to rebuild confidence in the asset class," is the year for large-caps to shine.
In addition to the broader economic factors, Galvin says that value stocks have had their run, noting that "valuations have converged," with large-cap value stocks near all-time valuation highs, and large-cap growth near 10-year valuation lows.
Unsurprisingly, value managers, who, naturally, given the recent market environment, were well-represented among the Lipper Leaders at the briefing, are not so quick to bury themselves. And while they may or may not see a turnaround for growth, all agree that there's plenty of opportunity in value, particularly in the mid-cap space.
After all, 2005 saw the Russell Midcap and Standard & Poor's 400 MidCap indices beating the S&P500. Mid-cap manager Diane Sobin, portfolio manager at the Columbia Mid Cap Value Fund, says "mid-cap stocks are in the sweet spot of [mergers and acquisitions]," which could lead to very attractive offers, boosting mid-cap fund performance in 2006.
James, whose fund is categorized as a small cap value offering, doesn't see much cause for concern in mid-cap's recent success over small-caps. He argues, with more than 6,000 small-cap companies to choose from, there will be plenty of opportunities in his space. He's less sanguine about growth stocks, positing that "growth will have its time over periods this year, but I don't know if its going to be consistent" in a "very volatile market."
That is, if the market turns out to be volatile. First American Mid Cap Growth Opportunities Fund manager David Chalupnik took issue with James' bleak economic outlook, arguing that other signs, including gross domestic product growth, contained inflation and the end of the interest rate cycle indicate that 2006 will not see a recession.
There may be no sure thing in making market outlook predictions, but there is one area that George Schwartz sees as unbeatable. Noting our continuing trouble with what he calls Islamist "fascists" in the war on terrorism, the manager of the Schwartz Value Fund believes that homeland security stocks are an unbeatable investment. War is hell, but to some, it's good business.
