So Now What Do We Do?

By J.R. BRANDSTRADER | MORE ARTICLES BY AUTHOR

Following last week's disaster in the stock market, top managers from Fidelity, MFS and Vanguard offer some advice for investors.

 

What are fund investors to make of last week's 6.5% drop in the Standard & Poor's 500 and sharp gains in Treasury bond prices? We decided to check in with a few well-regarded fund portfolio managers to get their thoughts.

Will Danoff, who runs $73 billion Fidelity Contrafund (ticker: FCNTX), which lost 3.52% on Thursday and is off 6.28% year-to-date, believes the sell-off suggests that the stock market is beginning to take account of peaking corporate profit margins and a deceleration in earnings growth. He has been using the recent bouts of volatility to upgrade his portfolio, buying companies with strong, long-term competitive positions and competent management teams.

"I haven't been trying to bottom-fish, but rather to invest in high-quality companies that have fallen subject to the broader market's retreat," Danoff says. Regardless of the market environment, he focuses on companies that are "best of breed." Although the Contrafund is down this year, it's still well ahead of the S&P500, which is down 8.87%.

Danoff, who focuses mostly on large- and mid-cap stocks, won't name names. But he says he's finding opportunities in "global blue chips" that benefit from the world's rising middle class and can withstand heightened volatility and uncertainty about economic growth.

"I am also finding opportunities in the technology sector, particularly those companies leveraging the power of the Internet, benefiting from key product cycles such as the proliferation of smartphones and tablets as well as the growing adoption of cloud-based services," he says.

ERIK WEISMAN, WHO RUNS both the $358.4 million MFS Global Bond A (MGBAX) and the $645 million MFS Inflation Adjusted Bond A (MIAAX) funds, "calls this Europe's 'Lehmanesque' moment." Euro-zone governments, he says, will have to figure out how to stay together or they'll fall apart. Weisman, who has done stints at the International Monetary Fund and the U.S. Department of the Treasury, thinks investors are right to seek haven in Treasuries. The euro has significantly more downside risk because the participating governments haven't taken the crisis seriously enough.

"The [low yield] levels of Treasuries are absurd, and nobody thinks they will stay there for the long term—but for right now, they are the place to be because the Federal Reserve is going to be buying in the belly of the curve and the long end of the curve," he says.

Weisman's Global Bond fund is up 6.81% this year to date, while the inflation-adjusted offering has gained 11.87%. Although he thinks that Treasuries are the best bet at the moment, he's also allocating some money to bonds from Canada, Australia and Norway, which have triple-A ratings and strong, commodity-backed economies.

Francis Kinniry, who helps shape investment strategy for $1.5 trillion-in-assets Vanguard, lays the blame for the pullback on the resurgence of the euro-zone debt crises, the prospect of a global economic slowdown, political paralysis in Washington, and the downgrading of U.S. debt by Standard & Poor's.

As hard as it is to handle, he thinks investors should bear in mind that the market is still 80% higher than its March '09 lows. He expects U.S. and international stocks to outperform bonds.

"This is a painful time, but investors should stick to their asset-allocation and use this time to rebalance their holdings," Kinniry says. A portfolio of 50% stocks and 50% bonds is still worth more than it was at the stock market's high in 2007, he adds. It may not feel that way, however.

Safety Rules

Equity fund net outflows averaged $1.1 billion and money funds $1.7 billion in the four weeks ending Wednesday, says Lipper FMI. Taxable-bond funds had inflows at weekly rate of $715 million; municipal funds averaged $70 million in inflows.

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