12/10/2013 4:15 AM ET|
Where the pros are investing in 2014
Will gold bounce back? Is biotech in a bubble? Eight leading money managers offer their best investment ideas for the year ahead.
Following the Standard & Poor's 500 Index's ($INX) record high in November, will stocks continue their ascent amid what's likely to be lackluster global expansion in 2014? In September, the U.S. Federal Reserve's unexpected delay in tapering its stimulus program whipsawed debt markets. Where should bond investors go for returns?
We asked eight of the world's leading money managers where they're placing their bets in the U.S., Europe and emerging markets for 2014. These mutual fund investors have beaten at least 90 percent of their peers over three or five years. They see more chances to make money in the U.S. and Europe, if you avoid the land mines, than in languishing emerging markets.
U.S. health care stocks, which have outperformed the S&P 500's 26 percent gain in 2013, may stumble as the Patient Protection and Affordable Care Act, aka Obamacare, reduces payments to hospitals, says John Burbank, founder of Passport Capital LLC. You should also be picky with biotech, which has gotten frothy after several years of gains, says Rajiv Kaul, a fund manager at Fidelity Investments.
Across the Atlantic, as the eurozone finally shakes off a recession, opportunities abound in Spanish banking and media industries after the post-crisis consolidation, says Dean Tenerelli, a fund manager at T. Rowe Price Group. You'll have to hunt through the wreckage in emerging markets, after local-currency debt plunged in 2013, to find sovereign-debt deals: Look for countries with strong balance sheets, such as Mexico.
Our distinguished panel also reveals why gold may be poised for a comeback and why small companies might see big gains in Asia.
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Fund manager, LMM LLC, Baltimore
Runs: $1.8 billion Legg Mason Opportunity Trust (LMOPX)
Returned: 74 percent in the year ended Dec. 3
Homebuilders to rise: "Many homebuilders doubled or tripled in 2012. Typically, after a year like that, homebuilders will go to sleep or down as valuations catch up and then outperform. I expect Pulte Group (PHM) to beat the market in 2014."
Fly with United: "Airlines did well in 2013. The industry historically has been a disaster. We like United Continental (UAL) a little better than Delta (DAL) because it has lower pension expenses. And United's valuation is lower because its integration of Continental is about a year behind Delta, which bought Northwest in 2008."
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Fund manager, T. Rowe Price Group Inc., London
Runs: $1.3 billion T. Rowe Price European Stock Fund (PRESX)
Returned: 14 percent annual average in three years ended on Dec. 3
No-brainer in Spain: "There's still a lot of value in European markets because earnings haven't begun to recover yet. Spain is a no-brainer because it's doing the right thing on a macro level. It had over 60 banks going into the crisis, and it will be down to a dozen. Spain will have a much better banking sector now. Bankia SA (BNKXF) was one of the problem banks, but the bad properties were taken out."
Power to sell: "Energy faces a challenge. There's a big shift in demand, since the U.S. isn't going to be importing much oil anymore. And shale is changing the supply equation as well. Oil-servicing companies are going to continue to struggle on pricing, margins and volume."
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Fund manager, Pacific Investment Management, Newport Beach, Calif.
Runs: $29 billion Pimco Income Fund (PONAX)
Returned: 11 percent annual average in three years ended on Dec. 3
Mexico stands out: "Emerging markets will likely fare better in 2014 than this year, but they're still susceptible to negative shocks from global macroeconomic factors. Countries with strong balance sheets and ample policy flexibility, such as Mexico, should outperform."
Demystify mortgage-backed securities: "We expect mortgage-backed securities that are not guaranteed by the government to be a solid performer in 2014. Many of them are still trading at a significant discount because of how complex they are. While many investors don't have the resources to adequately analyze the space, those who do can capitalize on the chance to profit. The U.S. nonguaranteed MBS market is the largest, has the most-complicated collateral and structures and also provides the greatest opportunities."
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Fund manager, Fidelity Investments, Boston
Runs: $7.4 billion Fidelity Select Biotechnology Portfolio (FBIOX)
Returned: 40 percent annual average in three years ended on Dec. 3
Beware a biotech bubble: "After five years of great returns, it's important not to lose touch with reality. Biotech has a historical tendency of bubbles and busts, so thinking about risk is really important now. I'm not saying we're in a bubble; we really could go either way. There's been a frenzy for issuing stock, and the market doesn't discount between quality and quantity when that happens. On the flip side, we're in this golden age of science with diagnosing genetic makeups. So you really have to pick the right stocks now. You can't just buy the biotech sector. There's going to be more differentiation, more winners and losers."
Seek targeted drugs: "Today, everyone can get a diagnostic of their genetic makeup for a few thousand dollars instead of $5 million only about a decade ago. More drugs will be produced to cater to diseases unearthed by diagnostics. There is a drug, Kalydeco, produced by Vertex, for people with a specific kind of mutation that causes cystic fibrosis. Companies that produce drugs for defined patient populations have an advantage over makers of drugs for the general population like Lipitor, which treats high cholesterol. For patients who need targeted drugs, there's usually no alternative. With a drug for cholesterol or diabetes, the cost of development is very high, since the Food and Drug Administration has very high safety hurdles for therapies given to millions of people who are generally healthy."
Ride the innovators: "The companies that are first to market with drugs can produce tremendous cash flow and high margins because there's such a high barrier to entry for others. Genentech developed a drug in the early 2000s for colon cancer called Avastin. There were about 10 other companies developing similar therapies at the time. They had a hard time being developed after patients were given Avastin because it was very difficult to show the benefits over Avastin."
Profit from generics: "The world of biotech will eventually divide into two different categories. One is low-cost distribution catering to a global market where everyone needs a cheap pill such as a generic Lipitor. It's a totally different business model because it isn't research-and-development-centric; it's more focused on distribution and volume. If you can find the winners in the next five or 10 years among generic companies, you'll do really well. And the other is a world where companies that are the most innovative will be rewarded the most as Western societies demand better outcomes."
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