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06/13/2012 7:00 am EST
In Part Two of MoneyShow.com’s conversation with Robert Pharr, the manager of the Destra Focused Equity Fund (DFOAX) describes how economic and business cycles affect his investment decisions. He also discusses some individual holdings that he likes at this point in the cycle.
Kate Stalter: Any names setting up that you would like to highlight?
Robert Pharr: We’ve found from examining past cycles going back 100 years that there’s a very high correlation to this phenomenon: in the early stages of an economic cycle, the most economically sensitive perform best, then what we would describe as growth at a reasonable price for information technology and consumer discretionary and telecom takes over. And then in the third phase, non-economically sensitive areas perform best, as the economy might plateau and roll over into a cycle-ending recession.
Our current weightings are 35% in information technology—and 35% is the maximum weighting per sector for us. Also, we have 35% in the consumer discretionary sector, 10% in health care, 10% in consumer staples, 5% in telecom, and 5% in finance.
The finance weighting is actually American Tower (AMT), a former telecom-sector name, but because of a change in tax structure to a REIT, all REITs reside in the finance sector. So, that may look like an anomaly for us, but it’s because of a year-end change in their tax structure.
Kate Stalter: I get where you were going with identifying these particular companies, as to where they are in the economic cycles at this juncture. But just spell it out a little bit more for our listeners. If they are interested in emulating, perhaps, what you are doing there, and looking for companies that might benefit at any given time, what should they be looking for right now?
Robert Pharr: We’ve said, repeatedly that the primary drivers in the economy today, and they have been for some time, have been consumer spending and business investment and spending. From that is where our heavy weighting in the consumer discretionary sector and information technology sector come from.
Clearly within the consumer discretionary sector, we have a number of major retailers, but in particular, retailers that might be described as high-end retailers. Coach (COH), Nordstrom (JWN), Bed Bath & Beyond (BBBY), Nike (NKE)—those are all positions within our weightings in the consumer discretionary sector. The driver there is the strong growth in retail sales and consumer spending.
Despite the apparent weakness in the economy, which we would describe as growing at a very moderate pace, one of the areas of strength has been consumer spending, despite the difficulties that there might be with residential housing, for example, a previous driver to growth in the US. Weakness in financial services, again, a previous driver in the economy.
The current drivers are consumer spending and corporate spending and investment. The corporate spending piece we express in the portfolio as a concentration in information technology companies that provide enterprise software, say, rather than consumer technology. Enterprise software, and equipment that corporations spend very heavily on.
In fact, the level of spending by corporations directed to technology is at an all-time high. It makes up the dominant portion, even the majority of corporate investment and spending, corporate capex. That’s been growing at a strong pace and that has benefited technology companies, especially those that provide service to corporations, typically enterprise software, and equipment.
Kate Stalter: Rob, last question for you today: Where do you see your fund fitting in with an investor’s overall portfolio?
Robert Pharr: We’ve been used several broad ways by investors, both individuals and institutional clients. Certainly one way is for investors that have used index funds and ETFs in the large-capitalization space. We’ve been able to achieve performance above the market on a consistent basis.
And for those investors, backing away from non-actively managed broad market assets to looking to advisors that might provide even significant alpha and outperformance versus the broad market, that’s been one kind of positioning for us.
The other is as a central core position within the large cap space for both the individuals and institutional clients. We have the ability to tilt the portfolio at times, having a portfolio with a very high correlation to traditional value investing, other times similar to now, a heavy leaning to growth at a reasonable price.
And then in the late stages of a business and economic cycle, our portfolio has a very strong correlatdion to traditional growth investing. We move through those approaches over a full business and economic cycles all with the goal of trying to keep client portfolios timely and appropriate and with that to provide outperformance over a lengthier period.
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