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This week, four U.S. domestic equity portfolio managers share their excitement and make the
case for equities in 2014. Iím Brian Jacobsen and you are On the Trading Desk.
This past December, a panel of equity portfolio managers addressed a live audience to share
their excitement for 2014. And we want to share their thoughts with you.
Jean-Baptiste Nadal is Managing Director and Portfolio Manager at Metropolitan West Capital
Management. He, along with Jeffery Peck, manage the Wells Fargo Advantage Intrinsic Value
Fund.
We love volatility. I think next year the big ìifî is tapering and tightening in the
U.S. I think I love that. I think itís going to create a lot of concern because weíre
going to see, maybe for the first time, at least for the last two years, de-synchronization
of monetary policy around the world. People are going to be very concerned about that.
And that is an opportunity for us. Because, if you think about it, itís like the British
said, itís when the investors are ìthrowing out the baby with the bathwater,î that we
can really pick those great companies at a significant discount. So, we love volatility.
When Jean-Baptiste mentioned the de-synchronization of monetary policy, he was referring to how
it is that in the United States we have the Federal Reserve reducing its pace of asset
purchases. But you have other developed markets and central banks, like the Bank of Japan,
where they are plowing straight ahead with stimulus. Then, you also have emerging markets,
countries like India, Turkey, Brazil, South Africa, all raising rates while in the developed
world, rates are staying low if not going lower. That creates, perhaps, some market
turbulence, or this de-synchronization and volatility. Now weíre going to turn our attention
to Tom Ognar. Among others he manages the Wells Fargo Advantage Premier Large Company
Growth Fund.
Itís kind of interesting. If top-line growth accelerates next year, I think most investors,
especially on Wall Streetóbut also like ourselvesóare underestimating the margin potential companies
have. I know they are at very high levels. But I think companies are so tight on their
spending plans, so productive and investing in productivity, that I think if you see that
increase in incremental revenue growth come through, I think itís really going to drop
the bottom line pretty explosively. So that would be the one opportunity that is pretty
interesting out there for next year.
Ever since the first quarter of 2010, companies in the S&P 500 have been posting profit margins
of around 8% or higher. For the fourth quarter 2013 itís possible that we will see profit
margins of just shy of 10%. And that would be a record. So, I think if we see a little
bit of economic growth, that could continue to translate into more rapid earnings-per-share
growth, especially as businesses continue to buy back their shares. Now were going to
turn our attention to what Bryant VanCronkhite has to say with his unique perspective as
a CPA, and what he has to say about the mid cap value space. Among others, Bryant manages
the Wells Fargo Advantage Special Mid Cap Value Fund.
To be honest, I donít spend too much time getting excited about anything. [Laughter]
I spend my time worrying about everything, actually. [Laughter] What I will say about
active management in the mid cap space is that over the last three years, thereís been
a huge headwind from interest rate movements. About 30% of the Russell Mid Cap Value index
is tied to interest rates. And as rates fall, that part of the index does well. Now I donít
know where itís going to go from here. But Iím pretty sure they are not going to continue
to go down forever. And when that changes, if you have a view on that, the Russell Mid
Cap Value index will be a little more challenging and active managers should do a great job,
be better positioned to beat the index going forward. So, I think the era for active management
in the mid cap space is just beginning. So, I find if I can worry about everything and
get that part right, the excitement will come later, and thatís going to come on its own
through stock-picking. So I just worry all the time. Iím not much fun to be around,
but, [Laughter] thatís all Iíve got. [Laughter]
Historically, mid-cap stocks have suffered fromóor perhaps benefitted fromóthe middle
child syndrome. You often times have Wall Street analysts focusing their attention on
the large-cap space. Then you, often times, will see more fast money plowing into the
small-cap shares. That leaves the mid-cap space, oftentimes, overlooked and perhaps
host to better values. Next, Tom Pence, among others, manages the Wells Fargo Advantage
Discovery and Omega Growth Funds.
Well Iím happy! [Laughter] I think thereís a lengthy discussion about this sort of glut
that weíre going to have of crude coming in the second half of next year. I think thereís
still the potential to underestimate thatóthe Gulf of Mexico just being awash with all of
this oil that will flow out of the Permian Basin. Iím excited to see that happen. Iím
excited to see what that means for refined product costs in the United States. I used
to work at a gas station when I was a kid when it was 50 cents a gallon of gas and I
saw overnight [snaps finger] in 1975 it went to about 75 cents and then it was a dollar
after that. So, Iíd be very curious to see what happens if you can compress the energy
quotient that consumers have to pay in this country and it would be very interesting to
see whether OPEC can respond to that.
The exciting thing about the hydrocarbon build out in the United States is the vast effect
it could have on U.S. growth going forward. Not only can it support U.S. profit marginsóas,
so far, they have been cutting costs through low interest rate expenses and low wage growthóbut
if we see lower energy prices, not only does that benefit their profit margins but it can
also benefit U.S. consumers as they see their energy bills decline. So, I think there is
good reason for excitement in 2014.
And now, Iíd like to leave you with my parting thought. While the beginning of 2014 has seen
a pick-up in market volatility, there are things to be optimistic about. In the risks
are the opportunities.
That is all the time we have for this week. Until next time, Iím Brian Jacobsen, stay
informed.