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Going Beyond Defensive Stocks to Find Value
Time to Pick up Bargain Buys, Managers Say
 By Dennis Trittin
Portfolio Manager
Russell Investment Group
November 7, 2001
As a manager of managers, Russell relies on the expertise of the managers selected for our funds. The varied views of these managers, operating from numerous regions, tracking different classes and buying stocks via diverse investment approaches, provide Russell with an invaluable web of perspective.
It is time, one of our fund managers says, to come out of the foxhole. Slowly, yes. But surely.
The manager believes that the flight to defensive stocks is over and now could prove to be a good time to buy some of the great franchises that have had their stock price battered following the terrorist attacks.
With low valuations, those stocks look more attractive than some of the defensive stocks to which investors almost blindly fled — without regard for valuations — during the third quarter slump.
Eager to arm their portfolios against the worst of the slide, investors cried "give me defense" and bought up consumer staples, health care, integrated oils, utilities and other classic defensive stocks. As a result, such sectors were far and away the best performers during the third quarter even as the more economically sensitive sectors, such as technology and automobiles, were hit really hard.
Russell Manager Views
It is now the belief of a Russell manager that the tide is starting to turn away from defensive stocks back to value stocks.
Others agree.
Indeed, almost without exception, managers are gradually becoming more aggressive in their stock purchases. They are nibbling at technology, industrials and retail. And they are scaling out of some of the defensive stocks that held up best during the third quarter downturn.
Many believe it is too late to be defensive. It is time to turn up the dial on aggressiveness a little. They still believe that consumer buying will lead the market upturn, they are turning to such sectors as retail and diversified financial companies.
Factors helping to boost manager confidence are:
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- The substantial degree of fiscal and monetary stimulus, which managers believe will ultimately find its way into the economy and be supportive of the market.
- A number of individual company valuations have been pushed down to extremely attractive levels.
- Lower interest rates and the accompanying refinancing boom — combined with lower energy prices — are providing extra cash for consumers to spend again.
- Put-to-call ratios and short interest indicate that bearishness among investors remains at extremely high levels. This is seen by many as a bullish sign as markets historically have tended to turn upward when bearish feelings are at their zenith.
- A lot of money is sitting on the sidelines earning a meager 3% in money market funds. Those assets represent a potential buying pool that could switch into stocks once investors become more confident.
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Valuations Remain High, Taming Aggressiveness
But managers are not going overboard on aggressiveness. A little, they believe, is better than too much aggression.
For one thing, they believe that many stock valuations are still too high priced.
Also, while managers are optimistic that the worst is behind us, they do not believe that gains in the next few years will be of the double-digit variety to which we became accustomed in the late '90s.
Another factor that is tempering manager enthusiasm is the expense of providing more security, at both the government as well as the corporate level, in the wake of the Sept. 11 attacks. Such spending does not enhance productivity and is an extra expense that will hurt profit margins.
Much of the future advancement in stocks is likely to depend on the degree to which consumer confidence is restored. The situation now can be compared with the reluctance of people to go back into the water after shark attacks. Concerns over personal and financial security are going to cause people to be cautious about re-entering the market.
Perhaps consumers, like fund managers, will return tentatively, one step at a time, until they know it is safe to swim again.
Copyright© Russell Investments Canada Limited 2001. All rights reserved. See Legal Information. Date of first use: 11/07/01.
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