Fidelity Focused Stock (FTQGX) has been a very strong performer. Stephen DuFour has managed Fidelity...
A Fund to Ride Tailwinds in Any Economy
06/12/2012 7:30 am EST
Fund manager Robert Pharr discusses how he capitalizes on the leading sectors in any phase of a business cycle. In Part One of his interview with MoneyShow.com, Pharr details which sectors he likes at this juncture.
Rob, you have a rather unique approach to large-cap investing, selecting sectors where you see tailwinds at any given time. Can you begin today by just giving us the big picture of the fund’s objectives?
Robert Pharr: Kate, the Destra Focused Equity Fund is for long-term investors looking for growth. I would say conservatively managed growth, but that’s our primary objective.
Kate Stalter: Let’s talk about how you go about the process of stock selection—what metrics are you looking for. Is this a top-down fundamental approach? Tell us a little bit about it.
Robert Pharr: We begin with a top-down, macro-driven process. We work under the presumption that business and economic cycles in the US are remarkably similar to previous cycles, at least in gross terms, that they follow a remarkable pattern from 10,000 feet, and that there’s a replication of patterns from one cycle to another.
But it’s as Mark Twain said: history rhymes, it doesn’t repeat. Each economic cycle is unique and different in the details, which we have to accommodate for.
Each business and economic cycle, we believe, is divisible into three distinct periods or phases, each with its own economic characteristics that reward certain kinds of businesses and might provide significant headwinds for other kinds of businesses.
All businesses have to operate in that present, current environment, and some manage to do a better job and be more timely, depending on where we are in a current business and economic cycle. We’ll target those businesses that we believe have economic tailwinds and avoid those other businesses that we believe face economic headwinds.
For the S&P 500, for example, there are ten distinct sectors, each one falls into a best fit during one of these three phases of each cycle. As we move through an economic cycles, we’ll have positions in each of the ten S&P 500 sectors, but each in its time.
Kate Stalter: Let’s drill down into that a little bit further, then. How do you make the determinations? What data do you use to show you which sectors you believe are enjoying tailwinds at the moment, versus those that are not?
Robert Pharr: We look at probably 150 different economic data series to paint a picture for us of the current business and economic condition. This is all publically available information. We don’t have some proprietary information that the general investing public doesn’t have access to.
We look at a broader range of economic data and I think look at it more thoroughly than most and that paints a picture for us of where we are in the current business and economic cycle.
Once placed within a cycle, we know what the current characteristics and attributes are of that phase of the economic cycle, and in turn, we know what businesses are advantaged. That leads us to invest in first, certain sectors of the S&P 500 that we believe are well placed and to drill down further to individual industries within the S&P 500 that are, in turn, timely, but also are sizable portions of their sector and representative industries within that sector.
Ultimately, we have to invest in individual equities to express our macro-driven view, and there we’re looking for first US-based, large capitalization companies. The S&P 500, for example, is our shopping list. But companies that are market-leading in their goods and products, that fit certain conservative financial structures that we like, low debt-to-equity ratios, but high ROE’s, for example, strong and consistent earnings growth versus their peers and versus the broad market, a well thought out and targeted business strategy that we can understand.
Kate Stalter: That’s a nice setup to begin talking about a few examples of some of the names that you are holding right now. Any come to mind that you’d like to highlight today?
Robert Pharr: Well, I’d like to show you where our sector breakdown is across the portfolio and from that, I think you can probably get an idea of where we believe we are in the current business and economic cycle as well.
I would tell you that the most economically sensitive areas of the market—for example, finance, industrials, basic materials, and energy—they perform best in the early phase, the first phase of a new economic cycle.
There’s typically a transition, as that economic backdrop evolves and develops, and other sectors of the S&P 500 take over, including information technology, consumer discretionary, and telecom. Then ultimately what we would call the third phase of each cycle—the non-economically sensitive area of the market performs best, including consumer staples, health care, and utilities.
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