A Shift to Mid-Caps Is Coming

06/24/2013 7:45 am EST


Jeanie Wyatt, CFA

CEO and Chief Investment Officer, South Texas Money Management, Ltd.

Jeanie Wyatt of South Texas Money Management continues to see a bullish cycle for equities, a low-interest rate environment, and a shift toward mid-cap names.

Nancy Zambell: My guest today is Jeanie Wyatt, the CEO and Chief Investment Officer of South Texas Money Management. Thank you so much for joining me, Jeanie.

Jeanie Wyatt: Thank you. Good morning.

Nancy Zambell: Please tell us about your company.

Jeanie Wyatt: South Texas Money Management is a firm that I started almost 13 years ago. I came out of a large regional-bank holding company, and really felt that individual investors were not being well served in the investment world in general, and that control of assets was actually shifting in an important way from institutions to individuals.

It's a very big shift in who owned the assets in the US. And I wanted to start a firm that really focused on how to serve individual investors better.

Nancy Zambell: Is your philosophy more on the conservative side?

Jeanie Wyatt: We are probably viewed as a conservative firm because we have a very strong focus on diversification. Diversification not only in securities, but also asset allocation.

But we very much have liked the stock market my entire career, and certainly since inception of the firm. We do have a strong focus on stock investing, and even though we've had a number of bear markets, we feel that the strategies that we employ help us to protect or hedge our equity investments and reduce volatility.

So we might be considered conservative because of our focus on diversification, but maybe not considered so conservative. Because again, we very much like investing in common stocks.

Nancy Zambell: In terms of protecting that portfolio, you're not using options, right? You're using some income investments?

Jeanie Wyatt: We're using asset allocation. The very best hedge for a stock portfolio is high-quality fixed income. So we've been very consistent in high fixed income. We've used them to hedge stocks, doing a lot of things to control the risk.

Then on the stock side, our best hedge is buying both value stocks and growth stocks. Those two styles are very underappreciated by most investors. Value and growth are very inverse—and again, very good hedges.

Nancy Zambell: In terms of strategy, do you use mostly individual equities, or are you also involved in the ETF or fund markets for your customers?

Jeanie Wyatt: Individual securities. We are not a fund. I realized many years ago that technology now allows managers to invest directly in stocks and bonds with lower cost, total transparency, and more control over tax management.

So, we are a registered investment advisor, and we manage individual securities, individual stocks, and bonds and other assets. We will utilize ETFs on occasion to get, certain sector exposure. But we prefer individual securities.

Nancy Zambell: In terms of market cap, you mentioned diversification, so I am assuming that you are diversifying in terms of individual investments and sectors as well as a market cap.

Jeanie Wyatt: Exactly. We buy large-, mid-, and small-cap stocks.

Nancy Zambell: Right now, what is your favorite in terms of capitalization?

Jeanie Wyatt: We really are shifting downward into more mid-cap names, and this will shift—and has shifted—over the history of the firm. We really have been very focused, more focused on large cap.

But we feel that again, this stock market is attractive and still has more legs, so it's still a bull market. We think the shift has been very much on high-yield stocks and value stocks. Conservative large-cap stocks will now broaden out and shift to more mid-cap and growth-oriented stocks.

Nancy Zambell: Very interesting. Probably a good time for that, too. On the fixed-income side, what are you all forecasting for interest rates? Do you anticipate any major changes in interest rates this year, or do you think that once Bernanke's out, then who knows what's going to happen?

Jeanie Wyatt: If Bernanke is out—and that's not a given—the certain front-runner, the highest probability contender for his job, is Janet Yellen. And she is actually more dovish, I'm told, than Bernanke.

Yes, the Fed policy is shifting—that's a given—and the interest rates and bond markets have already reflected that to a certain extent. But global growth is actually slowing, and this is, of course, the result of China dynamics.

So we don't think that this backup in interest rates is a shift that is terribly concerning or going to be a long ride. We think it's a short-term fiscal correction, and there will still be very major factors putting downward pressure on interest rates.

Nancy Zambell: So you don't anticipate, if we do end up tapering off, that all of a sudden we're going to get 1% to 2% rate increases?

Jeanie Wyatt: Right. Not at all.

Nancy Zambell: Speaking of global, are you investing outside of the US? And if so, are you doing more European-type stocks, South American, emerging markets?

Jeanie Wyatt: We use all of the ADRs in our screens to search for stocks in which to invest. American Depository Receipts are non-US companies that are traded on US exchanges and require SEC reporting.

We look at all of those international companies that issue ADRs. And we look at them fundamentally, just as we would US companies. We want each company to stand on its own merit. We're not buying them as a currency play.

Some of our best names actually have been those ADRs. In our portfolio currently, some of our new buys continue to be some of the large non-US pharmaceutical companies, like Sanofi (SNY) and even Unilever (UL) and the staple group. So yes, we do invest internationally as well.

Nancy Zambell: Sector-wise, are there any sectors currently that are your favorite?

Jeanie Wyatt: We always like the consumer discretionary stocks—quite frankly, because you can find some really good value stocks and some really good growth stocks.

We think the consumer is not broken in the US, and they really have repaired their balance sheets. And certainly with a slow growth economy where unemployment rates are improving, that's a good environment for consumers.

We were very early in the auto stocks, saw that that group really was overdone on the down side and that there was going to continue to be a big model refresh in the auto industry—due to the average age of the automobile on the road, and all the new technology that's available now. We thought that would be a good consumer discretionary area.

I mentioned the shift down to more mid-cap and growth-oriented names. The new name that we are buying is Dunkin' Brands (DNKN), which is the Dunkin' Donuts franchise group. We think they have some very visible growth with their new openings and new franchise strategy, in the US and around the world.

We like Gap (GPS) quite a bit; we're putting new money into Gap. We were also early in that name, because they have a lot of fundamental positives going on right now.

Cotton prices have been falling—that, in the past, has been a headwind for them. Also, they really have changed their strategy for their designers, and it's showing up in their store revenue and profitability.

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