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The Case for Mega-Caps

October 01, 2007
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Warren Boroson

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The economy is “in reasonable shape,” the stock market seems inviting, and large growth stocks and foreign stocks are good places to put your money.

That was the gist of a talk given by Gordon B. Fowler Jr., chief investment officer of the Glenmede Trust Company of Philadelphia , speaking in Morristown , N.J. , the other day.

What is he dubious about? Emerging markets. He’s lightened up.

Glenmede is a money-management company heaedquartered in Philadelphia , and a minimum of $3 million is required to invest.

But he is no Dr. Pangloss, eternally optimistic. The economic expansion is closer to its end than to the beginning, Fowler warned. And over the next five, ten and 20 years, the returns will be much lower than they have been in the past—maybe only 4 or 5 percent a year.

Shouldn’t the expansion be over by now? No, he explained, because cycles have been running longer—maybe eight years now. That may be because our economy is less focused on manufacturing and more on service, he speculated; maybe it’s because our economy is so big, it takes something really huge to knock it off course.

Yes, the housing mess may hurt us. Affordability is down in the dumps.

“The day my sister and brother-in-law said they were investing in condos in Myrtle Beach, because real estate was the only place to make money now, I knew the bubble was about to burst,” he said. “Brothers-in-law are a good contrary indicator.”

Meanwhile, retail sales have slowed to a crawl. High-quality debt is up.

But the declining value of the dollar is bringing down the trade deficit. And large-caps are usually the least hurt by a declining dollar because their sales overseas keep growing.

Earnings are still high, he went on, and the market is reasonably valued at 16 times trailing price-earnings ratios. Bonds also look good.

Yet the coming election is spooking investors—who don’t like uncertainty. So he doesn’t expect “a rosy 2008.”

Overall, he’s taking some money off the table and moving into bonds—because capital-gains taxes are so low these days. “And they are not going any lower.”

He had some unkind words about hedge funds: They used to be nimble, but now they’re not. “They may have turned into a contrary indicator.” When they have been heavily into stocks, stocks have sunk. Lately, when they have been light, the market has gone up.

“Mega-caps are the best values now,” he continued. “You’re not paying a whole lot for growth.” This year, in fact, growth stocks have been doing nicely.

A possible buy is the S&P 100 ETF—even though it doesn’t include any buy-out candidates. Meanwhile, he has lowered his exposure to small caps. These days, he said, it’s harder for value stocks to get the recognition they crave.

Foreign stocks seem more attractive than U.S. stocks, Fowler went on, and he ranked the countries’ stock markets in this order: Belgium , Italy , United Kingdom , France and Norway . Of 25 countries, the U.S. ranked 20 th. Last was Denmark .

If population growth is a measure of how successful a country will be, India may be the favorite. ( China has adopted a one-child-per-family policy.) Also, the country with the strongest economy tends to have the strongest currency—and over the next 50 years that seems to be India . But he mentioned that the economist who had made this argument was Indian.

“Which stock is his single favorite?” I asked. He’s a quant, he replied; he goes by the law of large numbers. But he mentioned Apple—“still attractive” despite its run-up; Coach (handbags, accessories); Invidia (graphics cards). Least attractive stocks: financial stocks, especially small caps. He’s also dubious about consumer staples: “They’re pricey.”

What about health-care stocks? He doesn’t own much; they’re having trouble replacing their big money-makers.

What about oil? It’s a bet on global growth. But “There are more interesting companies than Exxon.”

Fowler graduated from Brown University in 1981, and received an MS from New York University Graduate School of Bsuiness in 1985. From 1981 to 1994, he worked for J.P. Morgan’s investment management. In 1994, he joined J.P Morgan’s private bank as head of U.S. investment management.

A very bright fellow. I sometimes wonder why very bright fellows like him don’t do something more beneficial for humankind than just choosing stocks—like figuring out how we can extricate ourselves from Iraq with some vestige of our honor.

(When Fowler read this, he wrote back: "I sit on the board of a group called White-Williams Scholars. White-Williams supports high achievers in Philadelphia 's public school system with monthly stipends for maintainng a superior GPA and after-school college-prep courses. Close to half of all 9th grade students in the Philadelphia school system do not finish high school. Those that do are often under-prepared for higher education. Extricating ourselves with honor from Iraq would be very nice. Successfully graduating more kids from Philly's school system counts as a similarly ambitious and, I think, important goal.”)

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Warren Boroson
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